Go Back Up

Go back

What is bad debt?

Finance • Sep 5, 2023 12:00:00 PM • Written by: Georgia Reynolds

In this blog, we discuss the increase in bad debt for 2023, what bad debt is, how bad debt occurs, and the importance of credit insurance and credit control. 

In 2023, we've witnessed a significant increase in insolvencies, with a staggering 5,747 cases reported so far. As a result, UK government statistics have revealed that bad debt levels have soared to 61% for UK SMEs, with an average write-off of £16,641 per business. This sudden surge in bad debt has seriously threatened the existence of 27% of the UK's 5.5 million SMEs. In the face of such daunting statistics, it's high time we understood the intricacies of bad debt and the pivotal role that credit insurance plays in mitigating its impact.

Blog Image - Middle -1

What is bad debt?

Bad debt, in simple terms, refers to the money owed to a business that is unlikely to ever be paid by the debtor. That unpaid invoice lingers on your books, causing frustration and financial strain. Bad debt can arise due to various reasons, such as a debtor's insolvency, bankruptcy, or simply a refusal to pay.

How does bad debt occur?

Understanding how bad debt happens is crucial for businesses to prevent it. Here are some common reasons:

Insolvency of debtors: When customers or clients go bankrupt, it's tough to get the money they owe.

Late payments: Sometimes, customers delay payments intentionally or due to money problems. If this goes on, it can turn into bad debt.

Disputed invoices: Arguments about the quality of goods or services can lead to no payment. Solving these issues quickly is vital to avoid bad debt.

Inadequate credit checks: Not checking your customers' financial background can result in giving credit to unreliable or unstable parties.

Economic downturns: When the economy takes a hit, customers may struggle financially, making it hard for them to pay their debts.

The fallout of bad debt

Bad debt can really affect a business's cash flow and profitability. When a business doesn't get paid by its customers, it can make less money, making it harder to pay its bills on time and invest in new opportunities.

Businesses need to realise that bad debt isn't just about losing money. Not only does it reduce the amount of money a business is able to generate, but it can also mean that businesses have to pay more interest on loans or financing options.

In the worst cases, bad debt can even make a business close because they can't manage its money properly. That's why it's super important for businesses to have good plans to deal with bad debt and make sure they keep doing well.

The importance of credit insurance and credit control

Now that we understand the dangers of bad debt, let's talk about a powerful tool in mitigating its impact: credit insurance. This is a component included in our giant finance + product as part of our standard costing.

Credit insurance provides a safety net for businesses by offering protection against non-payment by debtors. It means that even if you or your clients face insolvency or financial distress, you can still recover the money owed. This vital protection empowers businesses to grow responsibly, managing risk effectively.

Employing the right strategies and processes, businesses can significantly reduce the amount of bad debt they have to write off. One such strategy is partnering with a reliable credit insurance provider like us, who can manage credit reporting and insurance claims on your behalf.

By combining credit insurance with effective credit control measures, businesses can proactively spot potential red flags and prevent invoices from going unpaid. Credit control means closely watching how reliable customers are with payments and how they handle money. When you use credit control together with credit insurance, it becomes a strong way to manage risks.

At Giant Finance+, we care about your financial security. That's why we offer standard bad debt protection and strong credit control processes to keep you safe from the risks of bad debt. Your business's success and financial stability are our top priorities, ensuring a brighter and more secure future for you.

Interested in discussing something you've read in one of our blogs?

Georgia Reynolds

Marketing Coordinator – Content