A study by Bibby Financial Services has found that the amount of bad debt being written off by small businesses in the UK has jumped by a worrying 70% in the last 12 months.
SME activity is often reflective of the health of the wider economy, so the results of the survey of 1,000 small and medium sized enterprises conducted by Bibby Financial Services is a cause for concern. Whilst some people speculate that it could be a sign of another recession on its way, BFS Global Chief Executive David Postings has said that it is “still too early to call”.
The survey looked at small business bad debt throughout May and June this year and compared it to the same period last year and found that the average level of debt had risen to a shocking £20,043.
The same study showed that small businesses are also investing less, with average planned investment dropping from £102,000 in the second quarter last year to just £60,000 for the same period this year.
Top 4 reasons why businesses aren’t investing
According to the businesses surveyed there are four main factors that are driving the cooling effect on small business investment, these are:
- Economic uncertainty (28%)
- Rising costs (26%)
- Desire to develop company cash reserves (25%)
- Uncertainty over the EU referendum (20%)
Many businesses have felt the effects of rising business costs caused by the sharp drop in the value of the pound, the increase in the National Living Wage and the introduction of pension auto-enrolment.
What is bad debt?
Bad debts are amounts owed that are unlikely to ever be paid back. Bad debt usually arises because a debtor business either goes into liquidation or goes bankrupt. Once this happens the debt can no longer be collected by the creditor and trying to pursue the debt further is usually more costly than the debt’s worth. Because of this, bad debts are usually just written off as an expense.
Why is bad debt rising?
There are a number of factors that could be contributing to the rise in bad debt, these include the increase in business operating costs, the holdup of the promised £300m discretionary business rates relief fund and a culture of late payments.
3 tips for avoiding bad debt
With today’s uncertain economic outlook, it’s very important that UK businesses take steps to protect themselves from bad debt. Use the three simple tips below to avoid losing time and money to bad debts.
- Check a company’s credit rating before doing business
- Have a procedure for chasing up payments
- Penalise late payments