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Ted Winterton 2012Edward Winterton, Commercial Director at Bibby Financial Services, discusses the risk of bad debt and what SMEs can do to protect themselves.

Bad debt is a serious issue affecting a large number of businesses in the UK and according to R3, the insolvency industry trade body, more than 100,000 British businesses are owed an estimated £16 billion by insolvent companies.

In some shape or form, bad debt is problem that affects businesses, irrespective of size or sector. However, the issue is particularly problematic for smaller firms who have often footed the bill for upfront costs – many of which don’t have sufficient cashflow to survive. Bad debt can occur for a number of reasons including customer insolvency or protracted default and all too often business owners don’t have the financial resources or access to advice to pursue legal action.

Findings of our latest SME Confidence Tracker show that over a quarter of small businesses are affected by bad debt today. But what’s most important for businesses who survive the effects of bad debt is the action they take in the aftermath to prevent it from happening again.

Research shows that almost a third (29%) of small businesses that have been affected by bad debt take no action following. Just four per cent seek bad debt protection from financial services providers as part of their funding arrangement and only five per cent diversify their business models.

But there are ways and means of minimising or even eliminating the risk of bad debt and there is support available:

  • Due diligence and effective credit control are paramount to understanding your customers and ongoing monitoring can help you to identify potential signs of bad debt before the problem arises.
  • Another way to insulate your business against this risk is to seek out bad debt protection to ensure you will still be paid if one or more of your customers becomes insolvent or unable to pay moneys owed.

Funders, such as Bibby, can offer bad debt protection as part of a business’s funding agreement and we also provide credit control and sales ledger management to help our customers’ identify potential issues before they become a problem.

While many risks facing SMEs are unknown and cannot be planned for in advance, the risk of bad debt is known and ever-present. The simple steps of researching your customers and business partners, understanding the business threats they may be facing, and understanding how bad debt protection can help, will protect the small business owner from the ‘known known’ of a bad debt.

You can find download our Keep Moving Guide for businesses here.