Small businesses lost £6bn last year from not chasing bad debts

 
Oliver Gill
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The advice remains the same for Britain's small businesses in particular: cash is king (Source: Getty)

Success is hard enough for Britain's small businesses but new research indicates that they are losing billions of pounds each year by writing-off unpaid debts.

During the 2015/16 financial year small and medium sized enterprises wrote-off £5.8bn of bad debts according to data prepared by Direct Line.

This against a backdrop where separate research by Fintech firm Ormsby Street indicates that 60 per cent of small businesses will fail within the first five years of trading.

"These enterprises really do make up the backbone of the British economy. However, it is alarming to see just how much hard work goes unrewarded, especially when considering that many small businesses appear reluctant to chase debts," said Direct Line's head of business Nick Breton.

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One in five small businesses said that they wrote-off debts and the analysis of those that did indicated that this was on average £31,330. Ten per cent of those that wrote-off debts said that they had given-up on chasing outstanding balances of £100,000 or more.

The most common reason for such write-offs was because a customer became insolvent – as was the case in 29 per cent of occasions – and on 17 per cent of occasions businesses did not "think" that the customer would have sufficient funds to pay.

One in 10 said that they were writing-off the debt because they felt chasing it would damage future business with the customer.

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Small businesses generally survive the first year according to Ormsby Street's analysis of ONS data, with 91 per cent still in business after 12 months. However, the inability of the majority of small firms to continue trading after five years was principally as a result of poor cash management.

“A small business can fail for many reasons of course, but poor cash-flow remains one of the main causes of problems. Poor cash-flow is mostly caused by late payment of invoices and this is certainly something that can be addressed by any small business," said Martin Campell of Ormsby Street.

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Having the awkward conversations is pivotal to being in the 40 per cent that remain trading. Campbell added:

Measures include being strict and up-front about payment terms initially and using the right tools to provide insight into how they should trade with customers and what action to take to reduce risk of non-payment.

This sentiment was echoed by Breton:

While maintaining a healthy relationship – and thus ensuring future income – is essential for businesses, many small businesses cannot survive without a regular cash inflow.

Small and medium sized enterprises should ensure that they are fully aware of all legal avenues designed to help them recoup all of their owed monies.

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