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Why SMEs are at greatest risk from other companies' insolvency

More than 100,000 UK businesses were left out of pocket in 2015 after suppliers or customers entered insolvency procedures. Around 6% of all UK businesses were creditors in an insolvency procedure, according to research by insolvency trade body R3.

Medium-sized businesses were worst affected by the problem; with one in seven (14%) of businesses employing 51-250 people being owed money by an insolvent company.

“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,” said R3 president Philip Sykes. “This leaves growing businesses, particularly medium-sized ones, at the most at risk of being exposed to others’ insolvencies.”

Sykes recommended that businesses should carry out careful credit assessments before trading with new individuals or companies in order to reduce their risk exposure.

While medium-sized businesses regularly faced losses from insolvency, smaller and larger businesses were much less likely to suffer. Only 4% of businesses with 250+ employees and 5-7% of businesses with 50 or fewer workers were a creditor in the last year.

Around 4% of businesses employing two to five people were a creditor in more than five insolvencies last year (23,000 businesses). By law of averages, every business should be a creditor once every five years, but these companies were facing five losses a year.

While businesses may recoup some losses through the insolvency process, most will recover little or nothing of what is owed to them.

“Credit control can be a real problem for smaller businesses,” Sykes continued. “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.”

R3 recommends that all businesses which are creditors in an insolvency process should make themselves known to the receivers or insolvency practitioners as soon as possible to have the best hope of a return.

If your businesses cash flow is struggling due to money owed have a look at our short-term finance solutions.

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