Small businesses struggle under debt mountain

More than half of SMEs are failing to collect on outstanding invoices, a new survey suggests. The result? Cashflow crises galore.

by Rebecca Burn-Callander
Last Updated: 19 Aug 2013

Company insolvencies are on the rise. Bank financing is hard to come by. Debts are mounting. And matters are not helped by slow payers. Yet the problem of unpaid bills is affecting more and more British firms.

According to a recent survey of 300 debt recovery lawyers specialising in the SME space, 94% have noticed a pronounced increase in the number of small business owners seeking legal action for unpaid invoices - over a third have seen a 50% spike.

This isn’t all that surprising given the financial climate: few small firms have cash to spare and financial difficulties anywhere in the supply chain are invariably felt by every link in the series. But with banks reluctant to lend, SMEs reluctant to borrow and limited access to other sources of finance, late payments are having a hugely damaging effect on company cashflows.
The average debts that specialists are being asked to recover stand between £5,000 and £10,000 (nearly half of all SME debt claims fall into this bracket), with almost one-fifth (19%) of legal eagles being asked to seize back debts of more than £10,000. And it’s not just about the size of the amounts owed, the frequency is rising too: a third of debt-recovery solicitors say they have noticed an increase in the individual actions being brought.
And even going to court doesn’t solve the problem: 70% of the cases that are successfully settled still take up to four months for the business owner to receive compensation, and for some, it takes six months or more.

Dan Watkins, director of the survey author, Contact Law, says: ‘It’s no coincidence that debt recovery specialists are seeing a massive surge in companies employing their services. The country is going through the worst recession in living memory and the SME community is struggling to keep its head above the water. Unfortunately, the rot caused by late payments spreads from the roots, upwards, affecting the businesses at the top that should otherwise be flourishing.’

These grim findings are backed up by the Federation of Small Businesses (FSB). In its latest ‘Voice of Small Business’ member survey, two thirds of business owners said that state of the economy was hampering expansion, and 41% cite poor cash-flow as the biggest barrier to achieving growth. National chairman John Walker, says: ‘With businesses confidence at a low, it is not surprising that the state of the economy is seen as the biggest obstacle over the next 12 months. Small businesses are committed and resilient, but they now need the government to match their ambition for growth.’

It all starts with baby steps, argues the FSB. 'Ensure that all public agencies follow the lead of central government and pay all invoices to small firms within 10 days,' it recommends. 'And insist that all contractors that the public sector uses pay their sub-contractors within the same time,' it adds. Set a good example and the private sector will follow, is the general idea. The government? A trailblazer? Well, it's a nice idea...

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