How to protect your business against late payment problems
How can you protect yourself from bad debt? A recent study by Bibby Financial Services found that 27% of SMEs in the UK have written off unpaid debts in the last year alone. As the economic outlook looks uncertain following the EU referendum vote, the problem could become a lot worse.
Smaller businesses are usually the least well equipped to cope with non-payment and late payment of invoices: with smaller cash reserves, a non-paying customer can easily impact the business’ own cash flow and credit rating. Trade credit insurance is a valuable protection against this problem.
The scale of the issue: bad debt and SMEs
Around 1.4 million SMEs in the UK experienced bad debt over the past year, with an average write-off value of £11,829. The issue is worse in some sectors than others. Transport and construction companies have been hardest hit, with 30% and 29% respectively reporting customer default in the last year.
For larger companies with an annual turnover of more than £5 million, write-offs were even larger. The average bad debt during the last 12 months was £25,000 for a company of this size.
Non-payment can be caused by a range of factors: dishonest clients, insolvency, and contractual disputes can all lead to default. Billing in some industries such as construction can be complex, with arguments about when a project is completed and when payment will fall due.
Governmental attempts to address the issue
The government has recognised that non-payment is a critical issue for SMEs. In May 2016 the Enterprise Act came into force, which makes provision for a Small Business Commissioner. Among other activities, the Small Business Commissioner will help SMEs resolve issues such as late payment of invoices.
The alternative of pursuing debts through the courts can be risky and costly. Taking court action can be time-consuming and stressful, plus there is always a chance that the non-paying customer will enter insolvency during the process, or convince a judge that the payment is either not due or only due in part.
How credit insurance can help small businesses
Credit insurance is an invaluable tool for small businesses to protect themselves against non-payment. This form of insurance means the insurer steps in to provide payment when a customer fails to do so.
Often, this type of policy is accompanied by a credit scoring service which rates and reviews customers for their creditworthiness. Businesses do not have time to keep checking on clients; this service carries out searches to make sure your biggest customers are not about to take a financial nosedive, leaving you out of pocket.
Insurance typically covers a percentage of any amounts lost, rather than the full invoice sum. The level of cover will be determined by your excess and premium cost. Often, a ‘final demand’ letter from a large organisation showing you have the means to pursue a debt is all it takes to get creditors to pay up. Credit insurance also often provides assistance with debt collection, which can be challenging.
Are you protected?
Is your business vulnerable to a customer default? Talk to Stride about how we can help you protect your interests should the worse happen.