What Is Bad Debt Protection in Invoice Finance?
Bad debt protection (non-recourse factoring) insures you against customer insolvency. If a covered customer goes bust and can't pay, the provider absorbs the loss instead of debiting your account. It costs 0.3-1.5% of invoice value on top of standard charges. Covers insolvency, not trade disputes.
Why This Matters
Bad debt protection fundamentally changes the risk profile of invoice finance. Without it (recourse factoring), if your customer goes insolvent owing £50,000, you owe that money back to the funder, often when you can least afford it. With non-recourse protection, the funder absorbs approved bad debts, turning invoice finance into genuine risk transfer. This matters acutely for UK SMEs dealing with larger customers or sectors with elevated insolvency risk. During economic downturns, construction and retail insolvencies spike, bad debt protection becomes crisis insurance. The cost (typically 0.5-1.2% of invoice value for most trades, higher for construction or new businesses) buys peace of mind and protects working capital. However, it only covers formal insolvency events like administration or liquidation, not commercial disputes, contra charges, or quality rejections, which remain your liability. Understanding what triggers a claim and what exclusions apply prevents nasty surprises when you need coverage most.
Key Points
- Non-recourse factoring includes bad debt protection as standard; recourse factoring requires you to buy it back if unpaid, or purchase separate credit insurance.
- Cover typically costs 0.3-0.8% for low-risk service businesses invoicing blue-chip customers, rising to 1.0-1.5% for construction, recruitment, or startups with limited trading history.
- Protection applies only to insolvency events (administration, liquidation, CVA defaults), not trade disputes, set-offs, contra charges, or invoice errors, which remain recourse to you.
- Providers set credit limits per debtor. A £30,000 limit means claims above that revert to you. Limits reflect Dun & Bradstreet scores and payment history.
- Claims require proof of insolvency (notice of appointment, Gazette entry). Informal arrangements or simply non-payment do not trigger bad debt cover.
- Most policies exclude invoices raised within 30-90 days of a debtor's insolvency if the provider can show you had prior knowledge of financial distress.
- Lloyds Bank Invoice Finance, HSBC Invoice Finance, and Close Brothers offer integrated bad debt protection; specialist credit insurers like Atradius or Coface underwrite standalone policies for selective invoice finance.
Real-World Example
A Leeds-based IT consultancy invoices a national retailer £85,000 for a systems integration project on 60-day terms. The retailer enters administration 45 days after invoice date, owing the full amount. The consultancy uses non-recourse factoring with Bibby Financial Services, which had approved a £100,000 credit limit for that retailer.
Bibby absorbs the £85,000 loss under bad debt protection. The consultancy receives no further funding against that invoice but owes nothing back. Without protection (recourse factoring), Bibby would have debited £85,000 from the consultancy's account, potentially forcing its own insolvency. The 0.9% bad debt premium cost the consultancy £765 on that invoice, a small price for avoiding an £85,000 hit.
Common Pitfalls
- Assuming all non-payment triggers bad debt cover. Trade disputes, quality claims, or customers simply going silent without formal insolvency leave you liable for the advance.
- Failing to check per-debtor credit limits before raising large invoices. If your £120,000 invoice exceeds the £80,000 approved limit, £40,000 remains recourse even if the customer goes bust.
- Raising invoices to a customer you know is struggling. Pre-insolvency exclusions (typically 30-90 days prior) mean claims fail if you had constructive knowledge of financial distress.
- Mixing up bad debt protection with credit insurance. Standalone credit insurance policies often have higher excess clauses (first £10,000 loss borne by you) and cover fewer triggers than integrated non-recourse factoring.
- Not reading the deed of assignment clauses. Some non-recourse agreements revert to recourse if you breach notification timescales or provide inaccurate debtor information.
What to Do Next
- Request a bad debt protection quote breakdown showing the premium rate per debtor or sector. Compare the extra cost against your historic bad debt write-offs to assess value.
- Ask for a sample credit limit schedule showing how limits are set and reviewed. Check whether your three largest customers would receive adequate limits for your typical invoice sizes.
- Clarify insolvency definition and claim timescales in writing. Confirm whether CVAs, Part 9 Moratoriums, or Scottish sequestration trigger cover, and how quickly claims are processed.
- If opting for recourse factoring, obtain standalone credit insurance quotes from Atradius or Coface. Compare premium, excess, and claim triggers against integrated non-recourse offerings from Close Brothers or Aldermore.
Related Questions
Does bad debt protection cover disputed invoices or quality issues?
No. Bad debt protection only covers formal insolvency events like administration or liquidation. If your customer refuses to pay due to a trade dispute, alleged poor workmanship, or contra charges, the debt remains recourse to you. You must repay the advance plus fees. Always resolve disputes before the customer becomes insolvent to preserve bad debt cover eligibility.
What happens if my customer goes bust owing more than their credit limit?
You bear the excess. If a customer has a £50,000 approved limit but owes £75,000 when entering administration, bad debt protection covers £50,000 and you repay £25,000 to the funder. Regularly review limits and avoid over-invoicing approved amounts. Some providers allow temporary limit increases for large one-off projects if requested in advance.
Can I add bad debt protection to existing recourse invoice finance?
Sometimes. Providers like Bibby Financial Services and Close Brothers offer bolt-on bad debt modules for recourse clients, typically at 0.5-1.0% of invoice value. Alternatively, arrange standalone trade credit insurance through Atradius or Coface, though this involves separate underwriting, higher excess clauses, and dual reporting. Switching to non-recourse factoring during a contract review is often simpler and cheaper.
Director, Market Invoice
Oliver leads Market Invoice's editorial and comparison research. With a background in UK commercial finance, he oversees provider analysis, rate verification, and industry reporting across all verticals.
Last reviewed: 6 April 2026