A business with a 10% net margin that writes off a £30,000 invoice needs £300,000 of new sales just to get back to where it was. That arithmetic is why credit cover exists. Bad debt protection is the version offered alongside invoice finance: the provider that funds your invoices also covers you if an approved customer cannot pay them.
What bad debt protection is
Bad debt protection: an optional add-on to a factoring or invoice discounting facility, also called debtor protection or credit protection, under which the provider or its insurer pays an agreed percentage of the loss if an approved customer becomes insolvent or, in some policies, fails to pay for a prolonged period. Cover is limited to the credit limit set for each customer and excludes disputed invoices.
Where non-recourse factoring builds the protection into the facility, bad debt protection is bolted on. That matters in two situations. It is the only practical way to obtain cover on an invoice discounting facility, where you keep control of collections. And it can often be applied selectively, so a business with one risky customer can protect that account without insuring the rest of the ledger.
Add-on protection versus standalone trade credit insurance
You can protect receivables without any funding by buying trade credit insurance directly from an insurer or through a broker. The cover looks similar; the practicalities differ.
Bad debt protection through your provider
- Arranged by the finance provider, usually under its own master policy
- Limits, monitoring and claims handled by the provider, which already sees every invoice
- Premium charged with the facility, often as a percentage of insured turnover
- Ends when the facility ends
Standalone trade credit insurance
- Bought directly from an insurer or via a broker; no funding attached
- You apply for limits, report overdue accounts and lodge claims yourself
- Annual premium, often with a minimum, based on insured turnover and loss history
- Continues regardless of how you fund the business, and can be assigned to a provider later
For a business already using invoice finance, the add-on is usually simpler. A larger business with its own credit team, or one that may switch providers, may prefer the independence of a standalone policy.
How the cover is set
Customers are assessed
The provider or its insurer reviews each customer you want to protect, using filed accounts, payment data and its own exposure to that company across other clients.
A credit limit is set for each customer
The limit is the maximum insured balance at any time. Balances above it are uninsured. Limits can be increased on request and reduced or withdrawn if the customer's profile deteriorates.
A percentage of loss is agreed
Cover is rarely 100%. A common illustrative structure pays 90% of the insured loss, leaving you a 10% excess. Some policies also set a minimum claim size.
Trigger events are defined
Formal insolvency is always a trigger. Protracted default, an undisputed invoice unpaid for a set period such as 120 to 180 days past due, is included in some policies and not others.
Whole ledger or named customers: some providers insist on covering every approved customer to stop clients insuring only the weak ones. Others allow selected cover. Ask before comparing premiums.
What bad debt protection does not cover
The exclusions are where most disappointment arises, so they deserve as much attention as the cover itself. Protection typically does not respond to:
- Disputed invoices. If the customer contests quality, quantity, price or delivery, the invoice is excluded until the dispute is resolved in your favour. A customer in difficulty will sometimes raise a dispute precisely to delay payment.
- Contras and set-off. Where the customer also supplies you, any balance it can net off is not an insured loss.
- Over-limit balances. Anything above the credit limit at the time of invoicing, and invoices raised after a limit has been withdrawn.
- Unapproved customers. Companies the insurer declined to cover, associated companies, consumers and, unless export cover is arranged, overseas debtors.
- The excess. The uninsured percentage, typically 10%, plus any minimum claim threshold.
Slow payment that resolves inside the waiting period is not a claim either; that is handled by credit control.
What it costs
Published market figures for bad debt protection are often in the region of 0.5% to 1% of insured turnover a year, charged on top of the normal service fee and discount charge. On £1.2m of insured sales that is £6,000 to £12,000 annually. The premium rises with sector risk, concentration and weak credit ratings, and falls where the ledger is spread across well-rated debtors.
Two things offset the cost. Protected invoices are often funded at a higher advance rate, and the premium replaces an unpredictable loss with a budgeted one. Our guide to invoice factoring costs shows where the premium sits among the other charges, and the factoring calculator lets you model a higher combined fee.
How a claim works
Overdue account is reported
Under factoring the provider already knows. Under discounting you must notify the provider when an insured customer passes the reporting deadline, often 60 to 90 days past due. Late notification can invalidate the claim.
Collection continues
The provider or its agents pursue the debt during the waiting period. If the customer pays, no claim arises.
Trigger event confirmed
For insolvency, the provider lodges a proof of debt once the administrator or liquidator is appointed. For protracted default, the waiting period must expire with the invoice still undisputed and unpaid.
Claim is paid
The provider credits the insured percentage of the covered balance and does not recover the advance. Any later insolvency dividend goes to the provider or insurer.
Who should consider it
- Businesses with concentration risk
If one customer is 25% or more of turnover, its failure is an existential risk whatever the rest of the ledger looks like. Named-customer cover on that account is often the most efficient use of the premium.
- Exporters
Chasing an overseas debtor through a foreign insolvency process is slow and expensive. Export cover, where available, transfers that problem to the insurer and can be a condition of funding export invoices at all.
- Invoice discounting clients
Discounting is almost always recourse. Adding protection is the only way to run a confidential facility and still have cover against customer failure.
Worked example: protection on one key customer
Illustrative example A wholesaler protects its largest account
A food wholesaler on a confidential invoice discounting facility sells £500,000 a year to one restaurant group, about a third of its turnover. It adds bad debt protection on that customer only: a £90,000 credit limit, 90% cover, premium of 0.8% of insured turnover. Eighteen months later the group enters administration owing £84,000 in undisputed invoices.
- Annual premium (0.8% of £500,000)
- £4,000.00
- Balance owed at administration
- £84,000.00
- Within credit limit
- £84,000.00
- Insured percentage (90%)
- £75,600.00
- Excess carried by the wholesaler (10%)
- £8,400.00
- Premiums paid over 18 months
- £6,000.00
- Net loss to the wholesaler
- £14,400.00
Figures are illustrative estimates only and do not represent a finance offer. Limits, cover percentages, premiums and claims handling vary by provider and circumstances.
Without cover the wholesaler would have lost £84,000 and had the advance on those invoices clawed back from availability at the same time. On a 6% margin it would have needed £1.4m of additional sales to recover the loss. With cover, the loss is £14,400 including every premium paid.
Want to know whether your customers could be covered?
Tell us who your main customers are and whether you use factoring or discounting, and we will explain the protection structures providers may put forward.
Where bad debt protection fits among the alternatives
| Feature | Bad debt protection add-on | Non-recourse factoring | Recourse facility, no cover |
|---|---|---|---|
| Works with | Factoring and invoice discounting | Factoring only | Factoring and invoice discounting |
| Scope of cover | Whole ledger or named customers | Usually whole approved ledger | None |
| Pricing | Separate premium, often 0.5% to 1% of insured turnover | Higher service fee | Lowest fee |
| Confidentiality possible | Yes, with confidential discounting | No | Yes, with confidential discounting |
The recourse versus non-recourse comparison works through the decision in detail, and the eligibility guide explains which customer types providers and insurers are willing to cover.
Frequently asked questions
Is bad debt protection the same as credit insurance?
It is closely related. Bad debt protection is credit cover arranged through your invoice finance provider, which usually holds a trade credit insurance policy behind it. Standalone trade credit insurance is a policy you buy directly from an insurer, independent of any funding. The cover is similar, but administration, pricing and claims handling differ.
Can I add bad debt protection to invoice discounting?
Yes. Most providers offer it on both factoring and invoice discounting facilities, including confidential discounting. You continue to run your own credit control, but the provider or insurer sets credit limits on your customers and covers insured losses within those limits.
Do I have to insure all my customers?
Not always. Some providers require whole-ledger cover to avoid selection against the insurer. Others allow you to protect named customers only, which is useful if your risk is concentrated in one or two large accounts. Ask which structures are available.
What percentage of a bad debt is paid out?
Cover is normally a percentage of the insured loss rather than the whole amount. 90% is a common illustrative figure, but 80% to 100% structures all exist. The balance is an excess you carry yourself. VAT is often excluded or reclaimable through bad debt relief rather than paid by the insurer.
How long does a claim take to be paid?
For a formal insolvency, payment typically follows once the insolvency practitioner's appointment is confirmed and the claim is lodged, which can take a few weeks. For protracted default the waiting period itself is often 120 to 180 days past due. Timing varies by provider and is never guaranteed.
What does bad debt protection cost?
Published market figures are often in the region of 0.5% to 1% of insured turnover a year, charged alongside the normal service fee. The premium varies with your sector, the credit quality of your customers and whether cover applies to the whole ledger or selected accounts. Any figure is illustrative until you have a written quotation.