- 17 Apr
Do You Need Non Recourse Bad Debt Protection?
Bad debt protection, also known as non-recourse, is a great product for many receivables financing users, protecting them against the possibility of taking customer bad debts. It is often seen as the product of choice as its gives the reassurance that you are less likely to take a bad debt should a customer fail.
At the moment particularly, with so much economic uncertainty, it can be very important for some businesses, however maybe not in all cases.
Does Everyone Need Bad Debt Protection?
There are sometimes situations where non recourse bad debt protection is not the most cost-effective option for a particular type of business. We were recently able to assist such a company, who operated in the temporary recruitment agency sector.
The business were already using a non-recourse factoring facility i.e. with added bad debt protection, but they had never made a claim against their debtor protection. The key reason for this was that their sales ledger was very well spread, across a large number of debtors with small individual balances.
Well Spread Debtors
In such situations, where a company is dealing with a large number of different debtors, the failure of any single debtor to pay may not present a significant risk to the overall business.
Often it is cases where there are prime debtors, and significant concentrations of debt into particular debtors, where bad debt protection can provide the greatest degree of reassurance.
In this particular case, as they had never made a claim, and their sales that she was so well spread that no single customer was likely to significantly impact their own business if they failed to pay, there was little point in our client continuing to pay the bad debt protection premium.
We were able to find them a recourse factoring facility that replace their non-recourse facility, and this delivered a substantial annual cost saving.
In addition to this, as part of the process of replacing their existing facility, we introduced them to a provider that was able to release additional funding from the sales ledger, over and above that which was being provided by their existing invoice finance company.
This example goes to show that bad debt protection, whilst an excellent product, is not always the most suitable option for every business.