This protection can significantly reduce certain losses when customers face difficulties in settling their bills. Nevertheless, it is important to note that it does not cover all forms of loss.
What is Commerce Credit Insurance
Cash flow is the lifeblood of any business so anything that reduces cash flow could jeopardise business success or even its survival. Any company that extends credit to its customers is at risk of slower or reduced cash flow if any of that credit turns into bad debt expense. Although some level of bad debt expense is often unavoidable, there are steps companies can take to minimize the expense.
What is Bad Debt Expense?
When a customer does not fulfill their payment responsibilities or is likely to default, the credit-granting company faces a bad debt expense. This expense reflects the amount of accounts receivable that the company is unable to collect at present and may never recover. As a result, this bad debt expense needs to be recorded against the company’s accounts receivable, which ultimately decreases the accounts receivable shown on the company’s income statement.
Many companies face challenges with bad debt expenses, and some have successfully adapted their strategies in response. For instance, one organization reevaluated its approach after two significant clients failed to pay their invoices, resulting in substantial financial losses. Compounding the issue, the company had invested considerable time and resources in attempts to recover these debts, all to no avail. By opting for credit insurance, the company not only safeguarded itself against future financial setbacks but also utilized this security to fuel its growth by attracting new clients.
Another rapidly expanding company became increasingly wary of its potential exposure to bad debt as its customer base grew. Previously, the firm had personal or reputational knowledge of all its clients. However, as it scaled, the realization dawned that it could not completely mitigate the risk of bad debt. With a surge of new customers, the company found it necessary to assess their creditworthiness through third-party data, which often failed to provide a clear and accurate representation of a customer’s financial health.
Talk to our experts about your customers, and learn all about the credit risks and opportunities.
Bad Debt Protection
Although it may be impossible for a company to completely eliminate bad debt expenses, there are several strategies it can employ to safeguard its financial health. One effective approach is to establish specific credit limits when offering customer credit, which can significantly reduce potential losses. These limits can be tailored to address both overall bad debt expenses and the unique situations of individual customers. For instance, a company might implement stricter credit terms based on the financial profile of each customer. In some instances, a company may choose not to extend credit at all, opting instead to require a letter of credit to ensure payment or demanding prepayment prior to shipment.
Additionally, companies might consider revising their credit extension criteria based on market conditions. If certain industries or regions are facing economic challenges, it would be prudent for companies to impose more stringent requirements for credit approval. This same tactic can be applied to customers who have significant outstanding debts or who are consistently late with their payments, ensuring that the company remains protected against potential financial risks.
What is bad debt protection?
What is the benefit of bad debt protection?
Businesses can secure bad debt protection, which ensures they receive payment even when a customer faces insolvency and cannot settle their invoices.
Many companies find that the protection offered against customer nonpayment is not very effective, as there are various factors beyond insolvency that can lead to nonpayment.
What’s the difference between commerce credit insurance and bad debt protection?
If bad debt protection isn’t suitable for a company’s requirements, there are viable alternatives available. One of the most effective options is commerce credit insurance, which offers coverage for customer nonpayment across a variety of situations.
The leading commerce credit insurance not only protects against nonpayment but also provides valuable credit data and insights that empower companies to enhance their credit-related decision-making and management. This proactive approach aims to mitigate losses from bad debt. While it’s impossible for any business to completely eliminate the risk of bad debt, commerce credit insurance is designed to safeguard against losses that may arise, even after both the company and the insurer have implemented strategies to reduce risks.
Unlike bad debt protection, which is limited to losses stemming from customer insolvency, commerce credit insurance extends its coverage to include “protracted default.” This situation arises when a financially stable company delays payment or fails to pay altogether. Additionally, a reputable accounts receivable insurance provider can customize a policy to address various other risks, such as:
- Unpaid invoices resulting from political risks, particularly in international markets
- Losses incurred from issues arising before goods are shipped, such as custom-made products that cannot be resold
- Losses that occur after shipment by a third-party contractor
- Losses associated with selling on consignment terms.
Protect Your Business Against Bad Debt Expense with Commerce Credit Insurance
While bad debt expense can pose significant challenges to a business’s long-term viability, there are effective strategies to manage this expense and reduce associated trade and credit risks. Commerce credit insurance offers protection against various losses linked to bad debt, equipping businesses with essential tools and support to enhance their credit management and accounts receivable processes.
WLC Insurance stands as the global frontrunner in the field of commerce insurance, specializing in commerce credit insurance. We provide a range of expert solutions, including accounts receivable insurance, business debt collection, protection against bad debts, surety bonds and guarantees, trade credit management, cash flow management, excess of loss (XOL) coverage, debtor insurance, and assistance with collecting overdue payments, late payments, and unpaid invoices. Our mission is to support customers worldwide in mitigating trade risks, making informed trade decisions, and fostering the secure growth of their businesses.