Bad Debt Protection: Frequently Asked Questions (FAQs)
High interest rates, rising input costs, squeezed margins, and delayed payments are increasingly putting UK B2B companies under financial pressure. When customers fail to pay because of insolvency or prolonged default, even a single bad debt can severely disrupt cash flow, stall investment, or force difficult decisions about staffing or supplier relationships.
Bad debt protection is emerging as a strategic tool for business leaders who want more than reactive tactics; it offers a proactive safeguard against the risk of non-payment. In this article, we explain what bad debt protection is, answer common questions, and show how UK businesses can benefit from it to build resilience and confidence.
Bad debt protection explained
Bad debt protection (sometimes offered under names like “debtor protection” or part of invoice finance facilities) is an insurance-type arrangement or financial facility that protects a business against losses when customers fail to pay invoices. This could be due to insolvency, administration, or prolonged default beyond specified credit terms. It can cover a portion of the invoice value, often up to 90%, depending on the policy and provider.
Frequently Asked Questions
- How is bad debt protection different from credit insurance?
- Bad debt protection usually works alongside invoice finance or factoring, protecting specific customers or invoices you choose. You may selectively cover high-risk accounts.
- Credit insurance (also known as trade credit insurance) often offers broader protection and may require more comprehensive credit assessments. It tends to cover an entire customer base under defined terms.
So, while there’s overlap, businesses may choose bad debt protection when they want flexibility and integration with existing invoice-finance arrangements; credit insurance is more comprehensive but can be more complex and expensive.
- What kinds of losses are covered, and how much?
Most bad debt protection policies cover losses arising from customer insolvency or administration and sometimes extended default (depending on provider and policy terms).
As for how much, many policies offer protection for up to 90% of the invoice’s net value (excluding VAT) subject to certain minimums (e.g. invoice value thresholds) and other criteria.
- Who is eligible, and how is eligibility assessed?
Businesses selling to other businesses (B2B) on credit terms are the typical candidates. Some eligibility criteria include:
- A stable invoice/sales ledger with some proven trading history.
- Good existing credit control procedures (keeping tabs on aged invoices, managing overdue accounts).
- Customer base with sufficient creditworthiness (both domestic UK customers and, where included, export ones). Typically, providers require approving the customers for whom protection is sought.
- What are the costs, and what trade-offs should businesses consider?
- Premiums or fees: Bad debt protection isn’t free. Companies usually pay a fee or premium based on the value of invoices covered, the risk profile of the customers, and the level of cover desired.
- Selective vs whole ledger cover: You may choose to protect only certain customers (e.g. larger ones, those you perceive as riskier) rather than the whole receivables ledger. Selective cover may cost less but leaves some exposure.
- Administration & reporting: Many providers require businesses to maintain proper records, report overdue invoices, notify them of warning signs (late payments, etc.), and sometimes undergo credit checks or monitoring of customer risk. Failure to comply with conditions can impact ability to make claims.
- Exclusions and timeframes: There are often waiting periods, thresholds (e.g. overdue for a certain number of days) before a claim is valid. Polices may exclude disputes, credits, or certain non-financial reasons for default.
- What are the advantages of using bad debt protection?
- Cash flow stability: Knowing that a significant portion of invoice values are safeguarded allows you to plan more securely, without the “what if this customer doesn’t pay” worry.
- Confidence to extend credit: With protection in place, you may be more comfortable granting credit to new or larger customers, or entering new markets, which can fuel growth.
- Reduced risk to profit margins: Bad debts can eat into profits. Covering most of the loss helps protect margins.
- Improved risk management: Many providers of bad debt protection also supply tools like credit risk monitoring, early-warning of customer financial deterioration, and analysis of customer risk. Those tools help you make better decisions.
- Are there any drawbacks or risks?
- Cost overhead: Even though it’s insurance-like, premium costs or fees add to your overhead. If you rarely face defaults, you may feel you’re paying for something you don’t end up needing.
- Potential for limited coverage: Some policies may not cover “non-financial” reasons for non-payment – for example, exclusions such as disputes, or limits per customer/invoice.
- Conditions and compliance: If you don’t keep up with required admin (reporting late invoices, following up clients), a provider may deny claims.
Conclusion
UK companies operating in the B2B space face challenging headwinds: high borrowing costs, squeezed margins, delayed payments, and greater customer risk. In that environment, bad debt protection is not just an optional extra—it can be a strategic essential.
By enabling you to protect a large portion of your outstanding invoices, bad debt protection:
- gives you peace of mind to trade with confidence,
- stabilises your cash flow in the face of customer insolvencies or defaults,
- supports growth by letting you extend credit to promising customers or explore new markets that might otherwise feel too risky.
However, it’s not a silver bullet. The best outcomes come when bad debt protection is paired with robust credit control, regular customer risk-monitoring, and good financial discipline. Also, carefully evaluate cost-vs-benefit: selective protection may make sense for certain customers; whole ledger cover may be better if defaults are a real concern across the board.
Contact us to help assess how exposed you are to customer default risk and whether bad debt protection could be the guardrail that allows you to focus on growth.
Key Takeaways
- Bad debt protection is insurance offering staffing firms a proactive safeguard against the risk of non-payment of invoices receivables.
- This article explains what bad debt protection is, answers common questions, and shows how UK businesses can benefit from it to build resilience and confidence.
eCapital UK
eCapital Commercial Finance (eCapital) is a leading invoice financier providing funding facilities up to £4m to support the growth of SMEs through the provision of flexible working capital facilities. With five fully functional UK regional offices, its local teams are uniquely placed to respond promptly and purposefully to the cashflow needs of its clients. The business has grown significantly since its launch in 2001, providing over £12 billion of funding to businesses. It is majority owned by eCapital, a US based financial services business with interests in the USA and Canada.
