Bad Company Debt
100,000 small and medium-sized companies have been left £16bn out of pocket as a result of bad company debt they may never recoup. The latest statistics show that more than one in ten British firms are owed money by insolvent companies that they have little chance of recovering.
The burden of these missing payments has fallen disproportionately on the shoulders of smaller UK firms, as corporate insolvencies, despite being at their lowest level for years, continue to affect SMEs. In 2015, six percent of all UK firms were owed money by an insolvent company, with the impact felt by some 113,000 UK firms resulting in liquidation or other formal insolvency procedures.
Medium-sized firms bear the brunt
The report by the insolvency industry trade body R3, found that only four percent of large corporations had given credit to a company that later became insolvent. This is compared to the 14 percent of medium-sized businesses that were left to count the cost.
Medium-sized businesses – those that employ between 51 and 250 people – were found to be the most vulnerable to bad debts, while only seven percent of smaller companies with 50 or fewer staff had been left out of pocket.
The UK’s smallest businesses, which only employ between two and five staff, were the most likely to be owed money by five or more insolvent firms. The repercussions of such a number of insolvent debtors can be particularly serious in this sector, with such small firms particularly poorly equipped to deal with this level of strain on their cash-flow.
The typical causes of bad debts
Growing businesses have always been particularly susceptible to bad debts for two main reasons. Firstly, firms choose to drive growth by taking on new customers and clients without properly checking their creditworthiness; in many cases, there is also a lack of controls in place to monitor the business’s exposure to these debts.
The result of this unchecked growth can be a real cause for concern for micro-businesses. When a small company is exposed to five or more different insolvencies there can be real cash-flow issues. For this reason, it is essential growing businesses are savvy about who they trade with.
Phillip Sykes, the president of the insolvency industry trade body R3, said: “If a business isn’t paid up-front or on delivery, or pays in advance for its own supplies, it’s essentially lending money to those with whom it is trading. This sort of ‘lending’ doesn’t have the same protection in insolvency situations that secured lending, like a mortgage, enjoys”.
HMRC is owed a quarter of unsecured debt in insolvency cases
British businesses are not the only ones to lose out. Her Majesty’s Revenue and Customs (HMRC) is owed about 24 percent of the unsecured debt in insolvency cases. HMRC is responsible for more compulsory liquidations than all other UK creditors put together. Despite this HMRC writes off somewhere in the region of £4bn a year in unpaid taxes following corporate insolvency cases.
Tips for reducing bad debts
Maintaining a healthy level of cash-flow is a constant concern for the directors of small and medium-sized businesses. Here are some tips to help reduce your exposure to bad debts and keep your cash-flow in the black:
1. Can you carry out a credit check? If not, ask for a bank or trade reference, or both;
2. Consider setting credit limits for the higher risk areas of your business;
3. Understand your business and look at past bad debts to see if you can identify trends and potential areas to avoid;
4. Are you dealing with a limited company? If so, ask for personal guarantees;
5. Include a clause in your terms and conditions that means your business continues to own goods until they have been paid for.
How can we help?
If your business is suffering from cash-flow problems or you’re struggling to collect money that’s owed, we can help. Call 08000 746 757, email: firstname.lastname@example.org or use our live support feature to get the advice and assistance you need.