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Increase in debt levels puts SMEs at risk

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A recent survey has revealed that in the financial year 2013/14 the burden of an average trade debt of £1.3m is putting the most vulnerable small and medium-sized businesses risk of going out of business.

The research was based upon account details submitted to Companies House by 9,100 SMEs. The total burden of debt in the UK from these companies has now reached £6.3tn, almost three times the national GDP.

Hardest hit are the UK’s micro businesses with a work force of 10 or less employees and an average turnover of less than £2m. The findings show that 12% of micro-SMEs are in ‘severe debt trouble’. The research showed that such businesses have an average of £68,000 trade debt. This in some cases amounts to one third of the average annual turnover of the company and puts micro businesses into a dangerous financial situation. In contrast, it was found that 5% of larger SMEs were in a similar financial situation.

Mark Burgess, chief operating officer at Debt Guard who undertook the research, said: “This research highlights there is a highly varied national trade debt picture emerging within the SME marketplace, created by unpaid and outstanding invoices. In the past SMEs have often been lumped together when it comes to debt management but it is clear that micro-SME’s in particular need much greater support in this respect.”

Burgess added that “as the backbone of the UK economy, many of these micro-firms are suffering from big trade debt issues with the threat of closure a real danger”. He gives a message to SMEs in a risky financial position: “Don’t write off your debt, look at legal ways to professionally recover it, as by improving credit flow, this will help put your business on a more stable financial footing”

It is anticipated that the introduction of the Small Business, Enterprise and Employment Bill will remove the barriers to growth for SMEs, including the issue of late payment. The main elements to the Bill will expand the availability and sources that small businesses require in order to secure the funding they require to grow.

Businesses need to constantly review their cash management process. Specialist debt recovery solicitors at Stephensons can provide assistance to businesses that are facing difficulties in collecting payment of overdue invoices. Debt recovery instruction form

Professional help should be sought at the earliest opportunity where businesses are concerned about their financial position.   Our Insolvency solicitors can assist businesses where a risk of insolvency arises.

By Nicola Whittle, Associate solicitor in the Insolvency team