Trade Credit Insurance vs. Bad Debt Protection: What’s the difference?

When businesses extend credit to customers, they take on risk. Late payments, defaults, or insolvencies can seriously disrupt cash flow, leaving companies exposed. To safeguard against these risks, two common solutions exist: Trade Credit insurance and Bad Debt Protection. While both aim to mitigate losses, there are key differences that make Trade Credit insurance the more comprehensive and strategic choice.

What is Trade Credit insurance?

Trade Credit insurance is a policy designed to protect businesses against non-payment of invoices due to customer insolvency, protracted default, or even political risks in export markets. It covers both domestic and international trade, giving reassurance to businesses that rely heavily on credit sales.

Beyond indemnifying losses, Trade Credit cover also provides proactive risk management. Insurers monitor buyers’ financial health, issue early warnings if a customer’s creditworthiness deteriorates, and may adjust credit limits accordingly. This support helps businesses make informed decisions about who they trade with and on what terms.

What is Bad Debt Protection?

Bad Debt Protection (BDP), often offered by banks or invoice finance providers, provides a more limited form of cover. Typically, it applies only to debts linked to a facility - such as invoice factoring - and only covers specific customers or invoices. While BDP compensates for losses if an approved debtor fails to pay, it doesn’t offer broader market intelligence, nor does it generally protect against wider trading risks like political instability.

In short, bad debt protection is reactive; you’re covered if something goes wrong with a named debtor. Whereas, in contrast, Trade Credit insurance is proactive, helping you manage risks across your entire customer base.

Why choose Trade Credit insurance over Bad Debt Protection?

1. Comprehensive cover
   Trade Credit insurance protects your whole sales ledger or a defined portfolio, rather than just a few selected customers or invoices. This makes it a better safeguard for businesses with diverse trading relationships.
2. Risk management support
   Insurers provide real-time intelligence and credit monitoring. This proactive approach means you can often avoid losses before they occur, rather than simply claiming after the fact.
3. Business growth opportunities
   With the backing of Trade Credit insurance, businesses can confidently extend credit to new or overseas customers. This not only reduces risk but also supports growth in competitive markets.
4. Improved financing
   Banks and lenders often view Trade Credit insurance positively, as it reduces risk on receivables. This can lead to improved borrowing terms and access to additional financing.

While Bad Debt Protection offers a degree of reassurance, it is narrow in scope and largely reactive. Trade Credit insurance goes further, protecting against a wider range of risks, supporting better credit decisions, and opening doors to growth opportunities. For businesses who are looking to trade with confidence and who are seeking more than just compensation after a loss, Trade Credit insurance is the superior choice.

To find out more about how Trade Credit insurance could benefit your business, please call our team of specialists on 01275 817320 or email tradecredit@specialistrisk.com