Working together to cure the bad debt epidemic for SMEs

With the UK economy in a current state of flux, there are several issues facing SMEs that threaten to stifle growth in 2018 and beyond, including supply chain pressure, late payment, falling investment and currency fluctuations.

But while the potential outcome of Brexit continues to dominate the news, there is one key challenge for SMEs that is consistently overlooked in deference of others: bad debt.

Unusually the issue of late payment hit the headlines in January this year when the facilities management and construction giant Carillion collapsed. This galvanised many supply chain managers to review their contracts and reconsider working with smaller suppliers that might be unfavourable to debtors. As a result, a number of industry initiatives were put into place to support SMEs – including our own.

Since then, statistics show a sharp increase in the number of businesses becoming insolvent in 2018. The Office for National Statistics (ONS) figures revealed that 4,462 businesses failed in Q1, an increase of 12.6 per cent from Q1 2017. We have also seen a host of household names go into administration – including some high-profile highstreet brands – which will undoubtedly impact SMEs as the effects ripple throughout their supply-chains.

These factors, in addition to other macroeconomic trends, means that businesses are writing-off increasing sums as bad debt. Bad debt, which occurs due to insolvency in the supply chain, protracted default or dispute, is particularly challenging for smaller firms that have often already footed the bill for raw material and labour costs. In fact, our research found that the average bad debt suffered by SMEs has increased by a third from £12,000 in Q1 2014, to £16,000 in Q2 2018. We estimate that in the construction sector alone, more than £2.8bn is written-off each year as customers fail to pay subcontractors.

This not only places a significant strain on businesses – sometimes even causing viable firms to fold –it also represents a huge economic leakage that needs to be addressed. However, unlike late payment, which is understood and prominent in the hearts and minds of smaller businesses and policymakers alike, bad debt is often overlooked.

For many small businesses, bad debt has simply become the hidden cost of doing business. However, there are steps that business owners can take to protect themselves. Such measures can include conducting thorough debtor reviews, seeking advice on contract negotiation and considering bad debt protection.

Although SMEs can take preventative action, more must be done to raise awareness of bad debt as an acute issue in the national business consciousness. No longer can the issue sit in the shadows of late payment – a similar, yet unique challenge for SMEs.

Despite the uncertainty and challenges that SMEs have faced this year, I believe that now is the time for public and private sector organisations to join with the Small Business Commissioner and business groups to tackle supply chain payment practices head-on. This debate should include measures to reduce the burns being felt by late payment, alongside the economic leakage of bad debt.

Kash Ahmad, UK Specialist Director, Bibby Financial Services

 

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