Your Bad Debt Reserve Is Not Enough for This Credit Cycle
If your company is relying on a bad debt reserve to manage receivables risk, you may be tying up capital, accepting unnecessary earnings volatility, and self-funding losses that could be transferred through trade credit insurance.
That is the real issue.
A bad debt reserve may satisfy an accounting requirement, but it does not prevent a customer default. It does not reimburse a loss. It does not strengthen your receivables as collateral. It does not help you extend more credit to good customers or pursue larger opportunities.
It simply waits for something to go wrong.
In the current insolvency environment, that is an expensive strategy.
U.S. bankruptcy filings in 2025 reached their highest level since 2010, and many forecasts expect further deterioration in 2026. Global corporate insolvencies are also projected to keep rising, with stress spreading across automotive, retail, construction, food, transportation, technology, and other sectors.
This is not a single-industry problem.
It is a credit cycle problem.
And the companies most exposed are often the ones that believe their reserves are enough.
The Decision Finance Leaders Should Be Making Now
Every CFO with meaningful receivables exposure should be asking one question:
What would it cost to transfer this risk instead of self-funding it?
Most companies have never compared their bad debt reserve against trade credit insurance side by side. When they do, the conversation changes quickly.
Assume you have a $2 million exposure to a key buyer.
If you self-insure, you carry a large reserve using your own earned capital. That capital sits on the sidelines. It does not grow revenue. It does not fund expansion. It does not improve liquidity. It simply waits to absorb a loss.
If the buyer defaults, your company absorbs the hit. Earnings are affected. Liquidity tightens. The write-off has to be explained to lenders, ownership, investors, or the board.
If the receivable is insured, the outcome is different. Trade credit insurance or accounts receivable insurance can reimburse up to the covered percentage of the receivable, often as much as 90%. Your reserve requirement may be lower because much of the loss has been transferred.
Same buyer.
Same default.
Different balance sheet outcome.
The issue is not whether trade credit insurance costs money. Of course it does. Everything costs money. Even pretending your reserve is “free” costs money, which is adorable in the way raccoons are adorable before they open your garbage.
The real question is whether the premium costs more than tying up your own capital and absorbing uninsured defaults during the worst insolvency environment in more than a decade.
In most cases, the answer is not close.
Why Reserves Can Create a False Sense of Security
Bad debt reserves are often treated as proof of discipline. Credit teams review exposures. Finance adjusts assumptions. The company appears prepared.
But reserves are backward-looking by nature. They are often sized using historical loss rates, payment history, and prior credit performance.
That creates a problem in a changing cycle.
The customer who defaults in Q3 may have looked fine in Q1. Their payment history may have been clean. Their financials may have seemed acceptable. Your team may have approved them for rational reasons.
Then conditions changed.
Your reserve was built for one environment.
Your company is now operating in another.
That is where self-insurance becomes dangerous. It assumes the company can absorb the loss, tolerate the earnings impact, and continue operating without disruption. For some companies, that may be true. For many, it is an unnecessary use of capital.
The Financing Upside Is Often the Bigger Story
The value of trade credit insurance is not limited to claim payment.
Insured receivables can be stronger collateral. Lenders often view them more favorably because repayment risk has been transferred to a rated insurance carrier. That can support larger credit facilities, better advance rates, or more favorable lending terms.
Trade credit insurance can also reduce bad debt provisions and improve Expected Credit Loss calculations under IFRS 9, creating cleaner financial statements and a stronger balance sheet presentation.
In other words, trade credit insurance is not just protection against a customer default.
It can improve the financial quality of one of your largest current assets.
That is not merely an insurance decision.
That is a CFO decision.
Why Market access matters
Not all trade credit insurance programs are equal.
If you rely on one carrier, you get one view of your risk, one underwriting appetite, and one set of terms. If that carrier tightens capacity in your sector, reduces appetite for a key buyer, or declines coverage on a concentrated exposure, you may have limited options.
A strong program requires full-market access.
At American Trade Finance, we work across the private trade credit insurance market, domestically and internationally. We benchmark carrier appetite, compare structures, negotiate terms, and build programs around each client’s receivables profile, customer concentrations, financing needs, and growth objectives.
More than a dozen insurers provide meaningful trade credit insurance capacity, but their appetites vary by industry, geography, buyer profile, concentration, and policy structure.
Knowing where to go matters.
The right carrier for a domestic manufacturing portfolio may not be the right carrier for an exporter selling into Latin America, Africa, Eastern Europe, or the Middle East. The right structure for diversified receivables may not fit a company with several major customer concentrations.
The details determine whether the policy performs when it matters.
What Insured Companies Can Do Differently
When the market gets uncertain, uninsured companies usually pull back.
They tighten credit terms. They reduce customer limits. They avoid new buyers. They walk away from opportunities that feel too risky.
That response makes sense when the company is self-funding every downside scenario.
Insured companies have more options.
With trade credit insurance, they can extend more credit to existing customers, pursue larger buyers, enter new markets, and compete more aggressively when others are retreating.
That is where trade credit insurance becomes more than protection.
It becomes a growth tool.
A company that can safely approve a larger customer limit has a competitive advantage. A company that can enter a new market with insured receivables has a competitive advantage. A company that can give its lender stronger collateral has a competitive advantage.
The companies that understand this do not use trade credit insurance only as a safety net.
They use it as a balance sheet strategy.
The Next step
If your company carries a bad debt reserve and has not stress-tested it against the cost of trade credit insurance, you are not seeing the full picture.
You may be holding too much capital in reserve. You may be accepting unnecessary earnings volatility. You may be presenting weaker collateral to your lender. You may be walking away from growth opportunities your competitors are prepared to insure.
Most importantly, you may be self-funding losses that could have been transferred.
At American Trade Finance, we structure trade credit insurance and accounts receivable insurance programs across the full private market for businesses selling domestically and internationally. We are an authorized EXIM Bank lender, a recipient of the President’s “E” Award for Export Service, and active across more than 30 countries.
Send us your current receivables exposure, top customer concentrations, and bad debt reserve assumptions.
We will show you the comparison.
The math is usually the easy part.
Visit www.americantradefinance.com. Let’s talk.