Is the UK on the verge of a surge in corporate insolvencies?

22/01/2019

The UK could be about to witness a spike in corporate insolvencies if a succession of recent research and reports are to be believed.

Figures from credit insurers, lenders and even the insolvency body R3 all paint a worrying picture for British businesses, who are struggling to contend with a number of pressures on their cash flows – with Brexit and late payment leading the way.

Euler Hermes, the global trade credit insurer, is predicting a 9% rise in corporate insolvencies this year, even if an exit deal is agreed with the European Union ahead of the deadline. In the event of a ‘no deal’ scenario, however, it expects this increase to soar to 20%.

The ‘B’ word

Brexit remains a significant concern for businesses across the country. While 74% of UK SME leaders are ‘fearful’ of what lies ahead this year, chief among those concerns is Brexit.

The insolvency body R3, meanwhile, say that 11% of UK companies are currently only paying the interest on their debts rather than the repaying debt itself. This is a common sign of so-called ‘zombie businesses’, a term used to describe companies which may no longer be viable but are able to continue trading thanks to the low interest rates.

Indeed, 8% of businesses in that same research say they wouldn’t be able to repay their debts should interest rates increase by only a small amount. Twelve per cent are already struggling to repay debts when they fall due, while 16% are having to renegotiate payment terms with their suppliers.

What’s behind all this?

While every business has to manage an array of different pressures on their cash flow, late payment continues to be a challenge that’s proving particularly difficult to master.

Almost one in four corporate insolvencies (23%) can be put down to late payment, according to the Association of Accounting Technicians, to underline the severity of this problem.

Not only does it highlight the importance for businesses to get paid on time in order to preserve their own health, it should also be a reminder about the importance of putting pressure on customers when they don’t pay on time.

The longer an invoice goes unpaid the more difficult it becomes to collect, and if your customer enters insolvency the likelihood of a successful recovery falls considerably.

So how can you protect your business?

There are a number of steps businesses concerned about their own financial health, or the health of their customers, can take.

Consider credit insurance

Credit insurance safeguards businesses against the risks of bad debt by protecting cash flow from debtor insolvency or protracted default (non-payment within six months). When an invoice ages or a customer enters insolvency proceedings, the credit insurance company guarantees payment for any goods or services supplied, subject to a designated credit limit. With this facility in place you can trade safe in the knowledge that, if your customer fails to pay, you will still be paid for your products or services.

Credit check your customers

Credit checks are a great way to establish the creditworthiness of your customers before you agree to trade with them on credit. While credit checking new customers should be standard practice, you should also routinely check repeat customers, whose position could have changed since you last assessed them. It’s rare for a business to suddenly become insolvent with no prior warning, and credit checks give you the visibility that’s required.

Concentrate on aged debts

Most businesses that trade on credit terms will have a few invoices that are overdue, many of which will be honest mistakes from the customer. But those that have been overdue for a while should be cause for concern, and it’s important to prioritise these. Particularly if you’ve been chasing the customer regularly with no joy, it’s important to know when to seek the help of a debt collection agency, who can assume responsibility for recovering payment whilst giving you back the time to focus on the rest of your ledger.

Review your credit control performance

The performance of your credit control function is clearly vital to limiting late payment. While some businesses will have a whole department dedicated to this, many smaller firms will have someone handling the accounts in and around their other daily responsibilities. It may even be the owner of the business. It’s important to review how this function is faring. If you’re regularly being paid late, perhaps the system you have in place simply isn’t working. Companies that lack the in-house resource or expertise to do this vital task sufficiently could consider outsourcing to a dedicated credit control agency, who’ll bring knowledge and experience whilst giving you back the time to focus on growth.

Consider external funding

Businesses which are struggling financially can benefit hugely from tailored funding. Such is the recent evolution of the commercial finance market that businesses of all sizes have access to more products and lenders than ever before, from short-terms loans to more specialist facilities. Talking to an independent broker can open up these avenues for your business and lead to the most suitable facility being identified and secured.

If you’re concerned about the health of your business or you’re struggling to collect unpaid invoices, talk to our team today. From debt recovery and credit control to fundraising, we can help with any aspect of cash flow. Contact us on 0800 9774848 or request a call back to find out more.