Bad debt continues to hinder SME growth
A quarter of the UK’s small businesses were hampered by bad debts during the last 12 months, as financial issues continued to be a stumbling block to growth.
It is believed as many as 1.3 million SMEs could be affected, either facing insolvency or the prospect of struggling to pay their customers or manage their supply chain.
The figures from Bibby Financial Services form part of the latest SME Confidence Tracker and paint a glaring picture of the issues being faced by many small businesses.
Since the Tracker was introduced for the first quarter of 2014, levels of bad debt have remained consistent at around the 25% mark.
This suggests a chronic problem since there are no signs of improvement, while businesses with more than £1 million in revenue were found to be most affected.
Of these businesses, 35% revealed they have faced bad debt in the past year, meaning even the more successful companies are being lumbered with financial problems.
The major debt issues can affect smaller companies more drastically though, as they have often paid costs upfront despite having insufficient cash flows to survive.
Having an awareness of bad debt and its consequences can aid small businesses, as they can look to take steps to minimise any potential impacts.
Bad debt can result from several different situations, as customers could face insolvency or some form of default, slowing the payment process.
Some small firms can struggle to recoup these costs as they lack the financial resources or access to advice that is needed to pursue legal action.
Detrimental effects on business were noted by a number of SMEs, as 27% said they faced lower profits while 4% said they were nearly forced to cease trading as they were unable to recover debt.
A further 5% of firms said they were forced to delay investment plans as a result of financial issues too, thereby limiting their growth potential.
The key for these small businesses is to take the necessary steps to reduce exposure to the risks associated with bad debt or to put plans in place that provide added protection against these circumstances.
By Phil Smith