Business Glossary
What Is Bad Debt Risk?
Bad debt risk is the possibility that a customer will not pay an invoice. Bad debts are a significant issue for UK SMEs — 50,000+ UK businesses close each year partly due to bad debt. Managing this risk is a core commercial discipline.
The Formula
Bad Debt Exposure = Outstanding Debtors × Concentration % of highest-risk accounts
Worked Example — UK SME
A UK B2B business: £95,000 outstanding debtors, largest customer owes £42,000 (44% of total). If that customer fails to pay, at 30% gross margin, the business needs to generate an additional £140,000 in revenue to recover the loss.
UK Benchmark
📊 Never allow any single customer to represent more than 20–25% of outstanding debtors without credit insurance or high confidence in their financial health. Recovering bad debts through sales requires 3–5x the bad debt amount in gross profit.
Common Questions
How do I check customer creditworthiness?
Run a Companies House check. Consider a commercial credit check through Experian, D&B, or Creditsafe (from £30). For significant accounts, ask for references from other suppliers.
What is trade credit insurance?
Insurance covering you if customers fail to pay due to insolvency or protracted default. Premiums typically 0.1–0.5% of insured turnover. Most valuable for businesses with high customer concentration.
How do I write off a bad debt for UK tax?
A bad debt becomes deductible for corporation tax when specifically identified as irrecoverable and written off in the accounts. Keep records of all collection attempts before write-off.
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