Should you be hedging against bad debt?

With bad debts on the increase, some companies are deciding it's time for an insurance policy...

Last Updated: 31 Aug 2010

The chances are that bad debts will be a growing problem for small businesses in the coming months. One of the biggest temptations for big companies when cash is tight is to take a little longer to pay suppliers (as Alliance Boots has done recently, according to the Federation of Small Businesses). In a recent survey by the UK200 Group, a trade body, 71% of respondents said customers were taking longer to pay up – and for small businesses that are heavily reliant on these payments, that can have disastrous consequences. Plus of course you may have other debtors who fall foul of the tough economic climate and end up not paying at all.

This worrying trend was already evident last year: according to not-for-profit group The Registry Trust, bad debt judgments against individual businesses jumped 4% to 185,395 in 2007. And its chairman Malcolm Hurlston reckons there’s a pretty good chance that number will go up again this time round: ‘I certainly expect the upward trend in commercial judgments to continue in 2008, which promises to be a tough year for British businesses - especially in the small and medium-sized enterprise sector, against which most of the commercial judgments are made,’ he says.

Many businesses that are struggling to squeeze money out of their debtors will resort to factoring or invoice discounting, which basically allows them to borrow cash against the value of their existing debts (albeit normally at a pretty steep price). And just to prove that one man’s meat is another man’s poison (or should that be vice versa?), some of the providers of this service appear to have identified a business opportunity amid our current economic woes: bad debt protection schemes, which effectively allow clients to insure themselves against the value of a debt going bad.

Commercial finance business IGF, which operates one such scheme, reckons it’s the best way of protecting your business from unforeseen consequences. ‘Nothing is more frustrating than running into difficulties with cashflow through no fault of your own’, says MD Tracy Ewen, who says her company’s aim is ‘to provide its clients with the financial security they need to grow and succeed’. Presumably it also plans to make a bit of money in the process, but perhaps we shouldn’t begrudge that – after all, for any small business, getting back 90% of a debt is a lot better than getting nothing at all...

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