Bad debts are not good for business. According to a report published by Red Flag Alert in Nov 2020, the level of business debt written off had increased from £1.84 billion in 2019 to £1.86 billion in 2020 with insolvent companies, on average, leaving behind £205,000 in unpaid invoices.
When a business defaults on its payment obligations, the company extending credit to that client faces a potential bad debt. Whilst one unpaid invoice may not bankrupt a business, several defaults could lead to unwelcome financial pressures.
As such, multiple debts could be detrimental to a company's long-term success but fortunately, there are ways to mitigate the risks of non-payment - Bad Debt Protection is one such option.
What is Bad Debt Protection?
Bad Debt Protection - or 'BDP' - is an insurance policy that covers a business should a client fail to pay an invoice or become insolvent.
In practice, if a client fell into financial difficulty - and failed to pay an outstanding debt - the policy provider would cover a percentage of any losses incurred as a result of non-payment.
Cover levels vary by insurance provider but typically, up to 90% is available - Against an unpaid invoice of £100,000 this could generate £90,000 in cover (less any administration fees).
Costs are tailored to each proposal but will be driven by key considerations such as sector, debtor risk profile, cover amount and policy term.
Interesting. Who typically uses BDP?
BDP is available to many businesses, from new startups right through to multi-jurisdictional corporates, covering a wide range of sectors including manufacturing, logistics, construction, recruitment and wholesale.
Further, businesses that utilise invoice discounting to support their working capital needs, may find BDP a useful 'add-on' to their facilities - Ultimately, providing a comprehensive funding plus protection solution.
Great, so how does BDP work?
A BDP policy can be provided on a standalone basis, or as noted above, bolted on to an existing invoice finance facility. The two most common forms of BDP are:
Single Risk – This provides protection against one debtor with a pre-agreed limit over a 12 month period.
Invoice by Invoice 'IBI' – Here protection is provided on a debt-by-debt basis with no contract, no minimum period and low upfront costs.
With either structure, a suitable level of cover will be determined in order to protect the policyholder from any potential client bankruptcy, business dispute or payment default.
In most cases, a policy can be setup in just 24 hours and for some proposals, unpaid debts can be backdated (typically up to 60 days).
Cover will be tailored to the business with a full debtor risk assessment conducted. Any existing clients will be credit checked and new clients pre-approved to help reduce the risk of bad debts.
This sounds great! What do I do next?
If you'd like to better understand the benefits and costs associated with setting up a BDP policy for your business, get in touch with the team at KeySME today - We're here to help!
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