Over 100,000 UK businesses were owed money by suppliers or customers entering an insolvency procedure during the last year, according to research by insolvency trade body R3.
In total, 113,000 businesses, about 6% of all UK businesses, were creditors in an insolvency procedure in 2015.
Medium-sized businesses – those employing 51 to 250 people – were most likely to have been exposed to another firm or individual’s insolvency, with one-in-seven (14%) of these businesses owed money by an insolvent individual or company.
Phillip Sykes, R3 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.”
Sykes said that businesses needed to take preventative measures and properly asses risks before trading with individuals or other firms. “Doing so will minimise the chance of being exposed to others’ insolvencies in the first place,” he added.
The research, from R3’s Business Distress Index, a long-running survey of the financial health of 500 UK businesses, also found that only 4% of large businesses (250+ employees) have been a creditor in the last year.
By comparison, between 5-7% of businesses employing between one and 50 people were a creditor in an insolvency process last year.
The research also showed that 4% of businesses employing between two and five people were a creditor in over five insolvencies last year (23,000 businesses) – the highest proportion of any business size in this situation. On average, all businesses should be a creditor in one insolvency procedure every five years.
Sykes added: “Credit control can be a real problem for smaller businesses. They might be selling goods or services, but 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 continued: “Businesses need to be savvy about who they trade with. If a business isn’t paid up-front or on delivery, or pays in advance for its own supplies, it is essentially lending money to those with whom it is trading. This sort of ‘lending’ doesn’t have the same protection in insolvency situations that secured lending, like a mortgage, enjoys.”
Debts are repaid in insolvencies according to a strict hierarchy set out by the government. Secured loans are at the top of the hierarchy, while those with unsecured loans, like trade creditors, are towards the bottom.
“Creditors in an insolvency process need to engage with the insolvency practitioner or Official Receiver involved as soon as possible once the insolvency begins,” said Sykes. “Those in this position are accountable to creditors and will represent their interests. The more communication there is, the higher the chance of a better return.”