Bad Debt Protection vs. Trade Credit Insurance: What You Need to Know

With the most prominent banking collapse in 15 years occurring in 2023, it might be tough to trust financial institutions in recent times. You might also not understand all the technical terminology they use when you look for the best financial protection for your business, making protecting your financial interests a gauntlet of the English language. Do you need some help knowing the differences between, for example, "bad debt protection" and "trade credit insurance"?

In this guide, we will help you learn what you need to consider when you plan to shield your business from financial risk. Read on to discover the benefits of credit insurance and what different business debt protection options can do for you. 

So, get ready to make a much more informed decision about your business that can help secure its future for years to come.

Understanding Bad Debt Protection

Understanding the basics of these two concepts is essential before digging deeper and learning the differences.

Bad debt protection (BDP) is very similar to an internal financial risk management strategy that a business or financial institution runs. The process tends to involve a financial service provider setting aside a reserve of funds to cover the potential of bad debts or the possibility of a client company defaulting.

When picking up bad debt protection, you tend to select specific recurring invoices to cover. Where a company might expect a substantial payment to occur in the future, you may even protect that singular source of funds. This service is juxtaposed with more general trade credit insurance policies, or "bad debt protection insurance," which will offer much more comprehensive and general coverage.

The level of protection such a policy offers will vary greatly depending on:

• The specific policy
• The financial health of the business in question
• The specific financial service provider
• Local laws and regulations
• The economic climate

Bad debt protection advantages include the fact that it can often offer more control over a policy's protection terms. At the same time, though, financial services may need to adjust protection terms based on the economic environment and the profile they create of the debtor. 

However, providers can often tailor bad debt protection services to better align with the company's credit policies. This process can offer a more consistent approach that matches the nature of the business in question.

Businesses should be aware, though, that the limited scope of coverage offered by bad debt protection may lead to vulnerabilities.

Exploring Trade Credit Insurance

Trade credit insurance (TCI) offers coverage against many different situations a customer might find themselves in, including:

• Defaults
• Insolvency risks
• Bankruptcy
• Political risks
• Inability to convert currency
• Seizure of assets

These policies tend to cover domestic and international transactions, meaning businesses with diverse client bases can still receive the full range of protections. At the same time, the protection is not limited to specific companies or invoices at the outset and, as such, can help more broadly.

However, this broad nature does not mean there are no limitations or exclusions, so negotiating an insurance premium may be a complicated step. These policies may also prevent a business from recovering its full debts.

These policies and their terms or limits are usually set annually after a new analysis of the business in question. As such, while premium costs may be more than with bad debt protection, it can allow an insurance company to extend more credit as a company grows.

Comparing Bad Debt Protection and Trade Credit Insurance

Both debt-handling methods can mitigate the risk of customers' non-payment, but they do so by catering to different needs.

Bad debt protection is a service typically offered by financial service providers. It...

• Covers only specific transactions
• Only protects against customer defaults
• Is often a part of a more extensive service
• May be a better choice for many smaller businesses
• Matches the needs of companies with high-value clients

Trade credit insurance is a more comprehensive insurance policy that provides broader protection. It...

• Can protect a company from issues related to any of their transactions and clients
• Covers not only defaults but many issues facing customers who do not pay
• Tends to be disconnected from other financial services
• Works better for those with many smaller clients or customers
• Helps businesses whose customers do not pay a lot for transactions

On top of these points, a TCI tends to be through an insurance policy provider. As such, making a claim will go through a professional claims process. Insurance brokers usually streamline these processes, which can help expedite the recovery of funds.

Bad credit protection, while still a formal process, will not be as rigid in format as with a TCI. As such, you may need to wait for it to resolve, or the service provider may require more work from you before you can claim.

Making the Right Choice for Your Business

Deciding between TCI and BDP requires assessing your risk exposure and any industry-specific challenges they face. They should also consider their financial strength and the specific clients they have.

Bad debt protection may be a better choice if the business needs a low-cost option, as BDP is often part of a more extensive financial service. As it is a much simpler process, smaller companies with limited portfolios may wish to take this path to avoid too much bureaucracy.

Trade credit insurance is instead a more comprehensive option and may appeal to businesses with large portfolios with diverse clients. Using this type of policy can often also be more impressive to investors due to the compliance and credibility of a TCI provider.

The Right Coverage for Your Business Future

Whether you want to select bad debt protection or trade credit insurance largely depends on your business's needs. However, we always recommend speaking to an expert who can advise you on your next steps.

ARI Global specializes in offering tailored financial solutions for a wide range of businesses. With offices across the country, they will understand your local needs and be able to help build the perfect TCI policy for you.

Protect your company's interests today. Get a quote from ARI Global and safeguard your business from financial risk before it's too late.