Equivalent to more than £21,000 every day, it is estimated that Britain’s small businesses wrote off a combined £5.8 billion in the last financial year.
When asked how much money their business had written off in unpaid debts in the previous financial year, around one in five (19%) small and medium-sized enterprises (SMEs) said that they had written off debts at an estimated average loss of £31,330. However, almost one in ten (9%) of these SMEs claimed to have written off debts in excess of £100,000, according to research by Direct Line for Business.
So why does so much money go unclaimed? The biggest reason for writing off this debt, cited by 29% of respondents, was that the supplier had become insolvent and was therefore unable to pay the monies owed. This was followed by those who said that they did not think that the supplier would have sufficient funds to cover the debt (17%).
The research suggests that money is also unclaimed due to a lack of awareness of the proper channels for reclaiming unpaid income. Nearly two thirds (6%) of SME owners and decision makers said that they were unsure what the N1 Claim form was for (the document used to start a civil claim in the English court). Only one in eight (16%) business operators knew exactly what the form was used for. Nick Breton, head of Direct Line for Business advises that, “SMEs should ensure that they are fully aware of all legal avenues designed to help them recoup all of their owed monies.”
However, the fact that many SMEs are not using the legal routes designated to help them reclaim lost debts may not only be a reflection of their lack of awareness as recent news heralded that small businesses are being priced out of court.
Breton continues: “With more than a million SMEs based across the UK, these enterprises really do make up the backbone of the British economy. However, it is alarming to see just how much hard work goes unrewarded, especially when considering that many SMEs appear reluctant to chase debts, with reasons ranging from thinking that the client may not be able to afford the cost to damaging their relationship.”
“All of these debts add up and with nearly 7,000 companies estimated to have entered liquidation in the first half of 2016 alone, the potentially disastrous knock-on effects of writing off monies owed are clear.”
The research also revealed that 82% of SMEs currently have balances outstanding from their debtors, with the average business being estimated to be owed £62,957. More alarmingly, a further 40 per cent of SMEs who have written off unpaid debts in the last financial year, claim that they don’t even know how much money they are owed by their debtors, which highlights the need for greater cash management amongst smaller businesses.
Ultimately small businesses are the ones being harmed the most by a reluctance to collect their debts, and if they are unsure about how to do so, the lost £5.8bn shows it is clearly important to find out.