Are you owed money by insolvent customers or suppliers? Then you’re far from alone, according to research carried out at the end of last year by R3 (the Association of Business Recovery Professionals).

Medium-Sized Businesses Worst Hit

The research from R3’s Business Distress Index, a survey of the financial health of 500 UK businesses, revealed that over 113,000 businesses were owed money by insolvent companies and individuals in 2015 – around 6% of all UK businesses.

It also showed that in the last year:

• medium-sized businesses (51-250 employees) were most affected, with 14% owed money by an insolvent individual or company.
• only 4% of large businesses (250+ employees) had been a creditor.
• between 5-7% of businesses with 1-50 people had been a creditor.
• 4% of businesses employing between 2 and 5 people (that’s a shocking 23,000 businesses) had been a creditor in over five insolvencies – the highest proportion of any business size in this situation.

Phillip Sykes, R3’s president, said: “Growing businesses encounter two classic problems: going for growth by taking on new customers without properly checking their creditworthiness; and a lack of controls to monitor their exposure.”

“This leaves growing businesses, particularly medium-sized ones, as the most at risk of being exposed to others’ insolvencies.”

“Although the UK insolvency regime is ranked as one of the best in the world, it is often the case that those owed money in insolvencies won’t see all of their money back. This can have a serious impact on their own finances.”

Advice for SME Creditors

Phillip Sykes says: “Credit control can be a real problem for smaller businesses… it can be difficult for a small or growing business to make sure it actually collects what it is owed.”

“When you have a small company exposed to more than five different insolvencies, there is a cause for concern. There could be real cash flow issues there.”

He advises SMEs to:

• Take preventative measures and properly asses risks before trading with individuals or other firms, to minimise the chance of being exposed to others’ insolvencies

• Be savvy about whom you trade with. If you’re not paid up-front or on delivery, or you pay in advance for your own supplies, you’re essentially lending money to those companies – but it’s not a loan that’s protected in insolvency situations and will be near the bottom of the list when debts are paid

• If you’re a creditor in an insolvency process, engage with the insolvency practitioner or Official Receiver involved as soon as possible once the insolvency begins. They are accountable to you and should represent your interests. The more communication there is, the higher the chance of a better return.