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Bad Debt Protection: Safeguarding Your Business
- Danielle Davis
- Mar 17
- 3 min read
What Is Bad Debt Protection in Invoice Finance?
When running a business, dealing with unpaid invoices is an unfortunate reality. While invoice finance helps bridge cashflow gaps, what happens if a customer fails to pay altogether? This is where bad debt protection comes in.
Bad debt protection is an additional product that can be added to your Invoice Factoring or Invoice Discounting facility. It safeguards your business by ensuring you still receive payment if a customer defaults or goes insolvent. Unlike traditional trade credit insurance, which covers a broad range of transactions, bad debt protection is tied directly to your invoice finance facility - making it a streamlined solution for businesses reliant on prompt invoice payments.
How Bad Debt Protection Works
Most invoice finance providers offer their own bad debt protection products, often managed by a major provider like Allianz or Atradius. Some lenders, however, outsource this entirely, requiring you to secure protection from a third-party provider.
Here’s how it typically works:
Adding Bad Debt Protection – When setting up your invoice finance facility, you can opt for bad debt protection as an additional service.
Customer Credit Assessment – The lender will assess the creditworthiness of your customers to determine coverage.
Invoice Financing – You continue using invoice finance as normal, receiving up to 90% of your invoice value upfront.
Customer Default or Insolvency – If your customer cannot pay due to financial difficulties, the bad debt protection kicks in.
Guaranteed Payment – The lender (or their insurance partner) pays the outstanding invoice amount, protecting your business from financial loss.
The Pros of Bad Debt Protection
✔ Safeguards Your Cashflow – Ensures your business receives payment, even if a customer goes bust.
✔ Minimises Risk – Reduces exposure to bad debts, providing stability and security.
✔ Better Credit Control – Many lenders conduct deeper credit checks on your customers, helping you work with financially stable clients.
✔ More Confidence to Grow – With reduced risk, you can take on larger contracts or new customers without worrying about non-payment.
The Cons of Bad Debt Protection
❌ Additional Cost – Bad debt protection isn’t free. It comes at an extra charge, either as a percentage of invoice value or a fixed fee.
❌ Limited Coverage – Not all customers may be covered, particularly if they have poor credit ratings.
❌ Lender Variability – Some lenders fully manage bad debt protection, while others outsource it, leading to potential service inconsistencies.
❌ Claim Conditions – Certain restrictions may apply, such as waiting periods or claim limits, which could impact your payout.
Is Bad Debt Protection Right for Your Business?
If your business deals with high-value invoices, long payment terms, or customers with uncertain financial stability, then bad debt protection is a smart option. It provides peace of mind, ensuring your cashflow remains intact even when customers default.
At 12s Finance, we match businesses with the right invoice finance lender based on your needs—including whether bad debt protection is a priority for you. We also ensure transparency, helping you choose a provider that won’t unfairly pass on additional costs.
Protect Your Business with the Right Invoice Finance Solution
Don’t let unpaid invoices derail your growth. Get in touch with 12s Finance today, and we’ll help you find an invoice finance provider with the right level of protection for your business.
