How to plan ahead of non-payment with trade credit insurance and bad debt protection

A bad debt is a receivable that a customer has not paid and is unlikely to be recovered, either fully or partially. This usually arises when a business sells on credit terms and records payments as accounts receivable, but the outstanding balance becomes unrecoverable over time. When this happens, it is written off as a bad debt, as there is no expectation of repayment.

Bad debt can also refer more broadly to financial obligations that become difficult to repay due to cash flow pressure, such as overextended customer credit lines, emergency overdrafts, or short-term high-interest borrowing used to cover funding gaps.

But not all debt is “bad”. Debts that are repaid consistently and on agreed terms, such as structured business loans or manageable financing arrangements, are generally classified as good debt.

While one or two bad debts of small amounts may not make much of an impact, large debts or several unpaid accounts may lead to heavy losses and increase your company’s risk of bankruptcy. Bad debts also make accounting processes more complex and consume valuable time and resources spent chasing unpaid invoices. In these cases, the cost of bad debt protection is often justified.

Bad debt protection helps limit losses when customers are unable to pay their bills. While bad debt cannot always be avoided entirely, businesses can minimise risk through measures such as credit controls, credit limits, and internal allowances for bad debts.

Want to see the real impact of a single bad debt on your business?
Try our Cover the Loss Calculator

Companies can manage bad debt in various ways. One approach is setting credit limits when extending customer credit to strengthen your risk position. These limits can be tailored to individual customers or applied more broadly to manage overall risk. In some cases, businesses may tighten credit terms, require prepayment, or request a letter of credit to guarantee payment.

Businesses may also adjust credit policies based on industry conditions, geographic risk, or customer payment behaviour, especially where accounts are overdue or exceed agreed thresholds.

• Coverage for customer insolvency: Bad debt protection insurance provides payment when a customer is insolvent and unable to pay their bills, with losses normally covered by the insurer rather than the business.
• Safety net for at-risk clients: This is particularly useful where certain customers present higher credit risk or represent a significant share of revenue.
• Saves time and resources: It reduces the time you spend chasing unpaid invoices and managing overdue accounts.

Bad debt protection insurance can also help businesses make more informed credit decisions by providing additional visibility into customer risk. That said, as non-payment can occur for reasons beyond insolvency, bad debt protection alone may not cover all scenarios.

If bad debt protection does not fit a company’s needs, there are alternatives. The best alternative to bad debt protection insurance is trade credit insurance, which provides coverage for a wide range of bad debt-related losses while supporting businesses to manage their accounts receivable more effectively.

The best trade credit insurance offers predictive protection through credit data and intelligence that helps companies improve credit-related decision-making and credit management. Since no company can avoid bad debt entirely, a trade credit insurance policy can cover any losses that occur even after the company and the insurer have taken steps to minimise losses.

If we compare bad debt protection to credit insurance, while bad debt protection only covers “losses from customer insolvency,” trade credit insurance also covers “protracted default,” which is when a solvent company is late with its payment or simply fails to pay at all.

See our quick guide comparing the main differences between bad debt protection and trade credit insurance: Download factsheet

A large, specialty trade credit insurance provider can also tailor a policy to cover other eventualities, including:

• Unpaid invoices due to natural disaster.
• Unpaid invoices because of political risk (inconvertibility, government intervention and war/civil disruption). For example, when doing business in other countries.
• Losses that occur because of problems before goods are shipped. For example, this could involve custom-produced goods that you can’t sell to another customer.
• Losses occurring after shipment by a contracted third party.
• Losses occurring when selling on consignment terms.

The bad debt protection cost for your business and specific needs depends on your business’s needs and the type of protection you buy.

It usually varies depending on the provider, the nature of your business, your industry, level of finance, and timeframes. So, the first thing you should do is ask for an insurance quote.

Trade credit insurance is vital for protecting your finances from non-payment from key clients. Without it, you could face real losses, not to mention valuable staff time and resources as you try to recover unpaid invoices.

Investing in trade credit insurance and non-payment insurance protects your business from potential bad debts while giving you the confidence to expand your customer base. With the right protection in place, you can focus on growth and stability rather than worrying about who will pay and when.

Contact us to get a trade credit insurance quote today and ensure your business is fully protected against unpaid debts.