UK SMEs crippled by total trade debt of £6.3 trillion

23 June 2014 -

Small- and medium-sized businesses are on the brink of a cash-flow crisis, as research for the most recent financial year puts average trade debt at £1.3m

Jermaine Haughton

Britain’s small- and medium-sized businesses face major financial hardship as their trade debt totalled £6.3 trillion during the past financial year, with late payment determined a major cause. Dimming the prospects of an SME-fuelled economic recovery, the new research by commercial debt-recovery firm Debt Guard Solicitors found that UK SMEs had an average £1.3m trade debt during 2013/14.

“Trade debt” is an umbrella term for money owed to a business – including current invoices and overdue payments – for goods and services supplied to customers throughout a financial year. According to the research, the most vulnerable companies are those with one to nine employees and a turnover of less than £2 million, broadly described as micro-SMEs. Based on accounts submitted to Companies House by more than 9,100 SMEs, 12% of UK firms in the “micro” category had dangerously high trade-debt levels that reached one third of annual turnover, with each averaging £68,000 in the red. Proportionately, the worst-affected regions were London, the North East and Yorkshire, where there is an average SME debt of almost £100,000, amounting to a quarter of business turnover.

Comparatively, small companies – the next step up from micro businesses, with 10 to 49 employees and a turnover between £2m and £10m – had an average trade debt of £936,000: around 17% of average turnover. England’s North West, North East and East Midlands are the worst debt areas for this type of business, with average debt of around £1m. Meanwhile, medium-sized companies with 50 to 249 employees and a turnover of £10m to £100m, had the highest levels of SME trade debt averaging £3.7m. However, that debt seems more manageable for medium-sized companies, as it covers just 13% of turnover. However, medium-sized firms based in London are twice as worse off, with average debt of £4.7m equalling 26% of turnover.

More often than not, the research shows, late payment is the root cause of the problem. Debtor days – the average duration taken for SMEs to receive payment from customers – are shown to wildly exceed the 30-day agreements that companies would typically set. That is particularly the case for micro-SMEs, who waited an average of 63 days for payment in the past financial year, while small companies and medium-sized firms suffered delays of 47 and 40 days respectively.

Debt Guard Solicitors chief operating officer Mark Burgess stressed that SMEs must act immediately to find ways of recapturing financial stability. “This research,” he said, “highlights there is a highly varied national trade-debt picture emerging within the SME marketplace, created by unpaid and outstanding invoices. In the past, SMEs have often been lumped together when it comes to debt management – but it is clear that micro-SMEs in particular need much greater support in this respect.”

He added: “As the backbone of the UK economy, many of these micro-firms are suffering from big trade-debt issues with the threat of closure a real danger. Our message to all SMEs in this position is, ‘don’t write off your debt’. Look at legal ways to professionally recover it, as improving credit flow will help put your business on to a more stable financial footing.”

For further ideas on maintaining stability, check out CMI’s special checklist guide on Managing Finance.