A bad debt is defined as “A debt that is not collectible and therefore worthless to the creditor. This occurs after all attempts are made to collect on the debt.” Bad debt rates are defined as the “annual level of expected losses”.
The rate therefore takes into account for any funds not repaid by borrowers and not recovered from the debt collection process. Estimated bad debt rates are annualised so they can be used by investors to help set their gross interest rates. Expected annual returns can be calculated by simply deducting the bad debt rate from their gross interest rate they are offering to businesses.
Using data from Experian, including the historical amounts of bad debts experienced in similar businesses, best estimates of the likely levels of bad debt that will be experienced in each risk band can be seen below.
|Risk band ||Estimated annualised bad debt rate |
|A ||1.5% |
|B ||2.5% |
|C ||3.5% |
|D ||5.5% |
|E ||8.5% |
|F ||15% |
No difference to estimated bad debt rates is expected for each risk band for debts of 1 ,3 or 5 years Go2 has not set minimum bid rates so investors should place bids to take into account the risk of loss from bad debt. Remember, you are lending to businesses so your capital is at risk.
Estimated bad debt rates are no guarantee of the actual bad debt you will experience for each risk band or individual loan. Investors should spread their lending across a portfolio of businesses to reduce the impact of any single default.