Your options are limited if a customer is unable or unwilling to pay what they owe, but you can take back control with bad debt insurance.
What is bad debt?
Offering credit terms allows companies to conduct transactions without immediate payment, enhancing business competitiveness and contributing to sales growth.
But there’s a catch. Your accounts receivable (the value of goods or services which are not yet paid for) is only an asset to your business if your customers settle what they owe when it is due. A bad debt is money owed to your business that you cannot recover because the customer is insolvent or refuses to pay. The sales process is only truly complete when the customer pays, and the sale is converted to cash.
What are the risks of bad debt?
If your business permits customers to purchase goods or services on credit terms, there is a risk of non-payment. This risk may increase during economic downturns when margins are tighter, and insolvencies become more common. After hitting a 30-year peak in 2023, the number of corporate insolvencies in the UK remains high with 2,424 companies becoming insolvent in May 2025, typically leaving a swathe of unpaid debts in their wake.
Even in good economic times, bad debts can occur if your customer is in financial distress or in the event of a dispute over an invoice. Businesses can experience unforeseen circumstances such as project delays, increased pricing, a lack of funding, or even poorly executed management decisions which lead to cash flow concerns and an inability to pay.
Whatever the reason, a bad debt is lost revenue that your business must then make up in increased sales. For example, if your profit margin is 10% and you are owed £5000, you would need to increase your turnover by £50,000 to compensate for the loss. And that’s without considering the impact on your cashflow which affects your ability to pay your own suppliers and other overheads, making it harder to get back on track.
It’s not surprising that many businesses are unable to recover from the financial shock and the failure of a corporate giant can often trigger an insolvency domino effect along the supply chain.
What can I do if another company won’t pay?
Even after good credit control procedures are meticulously followed, there are still unfortunate scenarios where more concrete debt collection activity is required.
If the company is still trading
Send a final demand, setting out the amount owed and the potential consequences if the debt isn’t settled by your deadline. This might be passing the debt to a professional commercial collections agency or taking the legal route by making a court claim. It’s also possible to issue a statutory demand for the money, giving the company 21 days to meet its obligations or face a winding up order.
Bear in mind that legal action can be time consuming and expensive (you’ll have to pay court fees, and you may need to instruct a solicitor) and there is no guarantee that you will get paid at the end. In some cases, the courts may insist that you go through the Mediation Service to resolve disputes.
If the customer is insolvent
Register as a creditor by contacting the relevant Insolvency Practitioner or the official receiver.
You’ll be asked to complete a proof of debt form and then added to the list of organisations and individuals who are owed money but be prepared to be near the back of the queue as an unsecured creditor. After around 12 weeks you’ll get a report with estimates of assets and liabilities and whether any payment is likely. Unfortunately, you’re unlikely to be contacted again but even if you are in line to recover some money it could take years for the debtor company to be wound up and its assets sold.
Writing off a debt
If you decide the debt can’t be recovered, you’ll need to adjust your accounts to ensure you aren’t taxed on revenue that’s uncollectable. The write-off method involves debiting the bad debt expense and crediting your accounts receivable for the same amount.
You should also talk to your tax adviser about claiming relief on the tax paid on bad debts e.g. VAT Relief to ensure you meet the conditions.
How can I protect my business from bad debt?
Bad debt poses an existential threat to your business, but a rigorous and consistent credit management policy can limit your risk. And opting for an integrated approach in partnership with an expert in the field will ensure you can trade with confidence.
In house credit management
If you aren’t doing so already, conduct due diligence on all credit customers to ensure they are an acceptable risk, including credit checks. Look for consistent profitability, strong liquidity, and low debt levels.
Check if it outperforms industry peers and maintains a good credit rating.
Assess its cash flow, market position, and management quality for a complete view of its health and market resilience.
Set out your payment terms and late payment interest policy clearly in contracts and invoices so there can be no room for doubt. A retention of title clause will assert your legal ownership of goods until they are paid for.
Monitor customers’ payment behaviour so you’re alert to warning signs that there might be a problem. Use the opportunity to ask them about the reasons and see if you can arrange a payment plan. Being polite but firm at this point is likely to be less alienating than pursuing them when the situation has deteriorated.
Ensure your credit control team is proactive about sending overdue letters and calling customers to chase outstanding payments. Inform customers if their account has been put on stop and what they need to do next.
Be prepared to put an account on stop to prevent customers ordering more until they have settled their account. Everyone in your company should abide by this.
Working with Coface
With more than 75 years’ experience in trade, Coface can help you optimise your credit management. More than 100,000 companies around the world currently trade smarter thanks to our core services:
Business Information – Check the latest relevant and accurate intelligence on the financial health of your customers.
Coface leverages the expertise of our global network of risk analysts and trade credit insurance underwriters who continuously examine a range of sources to make and update their assessments of company risk. These assessments are used to inform Coface’s own underwriting decisions, so we have a stake in getting the right outcome.
Our intuitive Urba360 platform gives you instant online access to our exclusive data on more than 220 million companies globally with six key indicators: a Coface score which shows the probability of default, credit opinion, financial ratios, late payment index, country and sector risk. You can also get customised alerts if there are any changes to help you proactively manage your risk and order in-depth reports if you want to find out more.
Credit Insurance–protects your bottom line and maintain cash flow with coverage for losses from non-payment of goods or services. We can pay validated claims within 30 days, enabling you to continue trading.
There are options to suit all sizes and types of business and different risks, from single risk cover to exports to your major customers. The price is set according to your turnover and your business profile, including your industry sector, number of customers, and previous loss history.
As well as helping you trade safely, a policy from a respected credit insurer provides strong evidence that your own business is a good risk for banks, investors and suppliers.
Download our Quick Start Guide to find out more about how credit insurance works and what to consider when looking for bad debt protection.
Debt collections– Collect outstanding payments from customers in the UK and overseas by outsourcing to Coface’s global team of trained, multi-lingual professionals.
Our financial leverage means we can investigate late payers and take legal action where necessary. Name recognition alone often shows that the matter is being taken seriously and prompts them into action.
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Any bad debt is a financial setback for your business and in some cases, it can mean the end of the road so don’t let yourself be at the mercy of events. Contact Coface to find out how we can help you build a bad debt safety net for your business.
