UK SMEs write off £5.8bn of bad debt

Poll shows small firms are walking away from bad debt in droves, with almost one in 10 scrapping bills worth more than £100,000

Questions are raging over the financial management behind the UK’s SMEs, following revelations that they wrote off a total of £5.8bn in bad debt during the last financial year.

According to a YouGov poll of senior SME decision-makers, carried out for insurer Direct Line, almost one in five (19%) had cancelled an average £31,330 of unpaid bills, while almost one in 10 (9%) had stopped pursuing debts in excess of £100,000.

Direct Line for Business head Nick Breton said: “With more than one million SMEs based across the UK, these enterprises really do make up the backbone of the British economy.

“All of these debts add up – and with nearly 7,000 companies estimated to have entered liquidation in the first half of 2016 alone, the potentially disastrous knock-on effects of writing off monies owed are clear.”

The survey discovered that:

1. Overall, 82% of SMEs currently have outstanding balances, with each firm owed an average £62,957;
2. 40% of respondents do not even know the full value of monies owed them;
3. 29% said they were highly unlikely to receive monies owed because key trading partners had become insolvent;
4. 17% had given up on debts because they suspected the purchaser would not have sufficient funds to cover them; and
5. Almost two-thirds (65%) said that they were unsure about the function and purpose of an N1 Claim form – the standard document for beginning a civil claim in the UK court system. Only 16% know exactly what the N1 is for.

On that last point, Breton stressed: “While maintaining a healthy relationship [with trading partners], and thus ensuring future income, is essential for businesses, many SMEs cannot survive without a regular cash inflow.

“SMEs should ensure that they are fully aware of all legal avenues designed to help them recoup all of their owed monies.”

The poll’s findings chime with other, recent research in the field, including a Bibby Financial Services (BFS) report of early August, which showed that 27% of UK SMEs had written off bad debt in the preceding 12 months.

According to BFS, that equates to 1.4 million SMEs suffering from bad-debt problems over the past year – with transport and construction emerging as the worst-affected sectors.

BFS Global chief executive David Postings said that bad debt was a “chronic problem” for SMEs that could lead to “staff cuts, delayed investment plans and – at worst – insolvency”.

Following the BFS research, an 18 August report from e-invoicing specialists Tungsten Network indicated that SMEs were struggling on procurement matters, too.

Some 28% said they could save between £5,000 and £20,000 per year by shopping around for better suppliers, while 15% estimated they could save as much as £50,000.

Tungsten Network CEO Richard Hurwitz said: “If British SMEs could realise even a small percentage of the estimated savings… profitability would soar and working capital as well as cash flow would be significantly improved, allowing businesses to be more agile and flexible.

“Smarter procurement would enable the UK’s SMEs to invest more capital back into their business, so they are prepared for whatever opportunities or risks may come their way.”

UK SMEs are still waiting for the government to name the nation’s small business commissioner – an advocacy and watchdog role enshrined in the Enterprise Act, which took effect in May.