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Worried about customer non-payment? Bad debt protection is essential

As market uncertainty lingers, protecting against bad debts provides much-needed assurance to growing businesses

Maddie Dumpleton

Late payments are a significant cash flow burden for businesses to bear, but what happens if invoices are not paid at all? The impact can be catastrophic and even fatal for companies dependent on the amount they are owed. 

In Growth Lending’s latest report, it surveyed UK SMEs across a range of different sectors to understand their cash flow challenges. The findings suggest that of the businesses that experience regular late payments, almost 1 in 10 have more than £1m tied up. This is a huge sum of money to recover if payments default due to business insolvency, or if a customer is unable to meet its payment obligations. 

With current macroeconomic uncertainty lingering too, there is no better time for business leaders to consider how they can boost their cash flow and protect against losses of this kind. 

Finding funding that includes bad debt protection (BDP) can help with this. 

What is bad debt protection? 

Bad debt protection provides peace of mind that if one, or a number, of your customers is unable to repay their debts or becomes insolvent, you will still receive payment.

The extent to which you are protected will depend on the BDP limit agreed with your provider. 

How does bad debt protection work?

If a business is operating with a revenue of £2,000,000, working off a gross margin of 10% and several of its customers default on payment up to the value of £200,000, the business would need to generate an additional £2,000,000 of sales to recoup its lost margin.

With bad debt protection, you will be able to recuperate a proportion, or the entire amount lost, removing the stress of trying to cover the loss.

Why is it important? 

First and foremost, non-payment has the ability to severely damage your business, as your bills will continue to accumulate whether you have been paid or not. This means you might be operating in a large cash flow deficit as you try to recuperate your losses. 

Bad debt protection also removes any concerns that you may have over your client’s customers. No matter how well you know your debtors, it is hard to get a full understanding on who owes them money and how reliable they are. 

The reputation of blue chip companies cannot be relied on either. The demise of Blockbuster, Toys-R-Us, BHS and Carillion are all examples of this, showing that customer non-payment should be considered when you enter contracts with established companies too.

Lastly, and more positively, bad debt protection can give you greater confidence to pursue more commercial opportunities, as you have the comfort of knowing that your debt is protected, leaving you free to strive for growth, whether that be domestically or internationally.

How do I get bad debt protection on my invoices? 

Bad debt protection can be secured on a standalone basis, or secured through an invoice finance facility.

While many financiers will charge this as an extra, at Growth Lending we include this as standard with all of our facilities, up to an agreed limit. 

For more information, speak to a member of our expert lending team who will be able to talk you through our funding process and how our bad debt protection works.