Bad Debt Protection/Credit Insurance – Worth Paying For or a Waste of Money?

Generating recruitment fees is the lifeblood of any agency and once a placement is made it is vital that they are paid (preferably within terms!)  However, no one can predict how a billing client is performing financially so there is always a risk that the client may delay payment, not be able to pay or even go bust before the payment is made.  In order to protect themselves financially, some agencies will mitigate this risk by deciding whether to take additional insurance to avoid losses against clients not paying their invoices.  However, there are different types of insurances available either from invoice finance companies or from credit insurance companies directly and as the agency you must decide what the material risk is against the cost of having the policy.

There are 2 main types of insurance available to recruitment agencies:-

BAD DEBT PROTECTION
Bad Debt Protection (BDP) is often provided by invoice finance companies to cover debts should a client go into liquidation. The debts protected will depend on the credit limit applied against that particular client at the time when they go bust.  When the recruitment agency takes on the finance agreement they will decide whether they want this additional bad debt protection as part of the facility; the cost is charged as an additional service charge percentage against the invoice values uploaded to the facility.

CREDIT INSURANCE
Credit Insurance is provided by a few invoice finance companies and also by credit insurance companies. Credit insurance companies will charge this as a fixed annual fee whereas an invoice finance company will charge this as part of the service charge percentage.  Credit insurance not only covers debts should a client go into liquidation, but also when a client falls into a ‘can’t pay/won’t pay’ situation within 120 days of the invoice being raised. This type of policy can also be known as having protracted default.

There are a number of factors that an agency needs to think about before deciding whether to take out insurance against their debtors:-

ARE ANY OF THE CLIENTS IN THE PUBLIC SECTOR?

Clients in the public sector are extremely unlikely to go bust or are often supported by government backing so recruitment agencies providing staff to industries such as the medical, education and other public bodies often do not require any insurance.  However, should any of the clients decide to use RPOs to process their invoicing then it is advisable to assess the impact of these as not all policies will cover these clients due to their pay-when-paid clauses.

WHAT ARE THE CURRENT AND FUTURE CLIENTS CREDIT RATINGS?

Before deciding if insurance is required it is often a good idea to see what the credit ratings are of the current and potential future clients are.  If the ratings come back to say that the clients are a potential risk then it would be advisable to take the insurance and also decide if you want to do more business with those clients.  However, if the ratings come back with good credit scores and look less likely to go bust, then it may be an idea to decide whether credit insurance is required based on the cost.  Also if a large number of your clients cannot get credit insurance then you need to assess whether the cost of the policy is worthwhile as it is often based on the full turnover of the business.

WHAT IS THE FINANCIAL IMPACT IF ONE CLIENT GOES BUST AGAINST THE COST OF THE POLICY?

The best way to assess whether insurance is required is to decide what the impact on your business will be if your largest client goes bust.  If you have a large spread of clients and the impact of one of them going bust can be recouped from the profitability of the other clients, then it may be that the policy cost is not really worthwhile. However, if you have one main client that would have a serious effect on the company’s finances should they go bust then it may be best to take out the policy.

TBOS helps set up and manages the credit insurance for many of its contract recruitment agencies, either through their invoice finance facility or via a credit insurance company.  TBOS ensures that the credit limits match the outstanding debtors and notify the agencies should there be a change in the ratings or if a limit cannot be raised to cover the debts.  As TBOS also looks after the credit control process for all of the agencies that we manage, we are often aware of any financial difficulty or payment issues that may occur with the agencies clients.

For more information on how TBOS can help manage your credit insurance needs, please contact our office.