Trade debt – which effectively means outstanding and overdue invoices – has left around one in eight SMEs in severe debt difficulties of their own, according to a recent report.
Specialist solicitors Debt Guard found 12% of micro-SMEs, defined as those with fewer than ten employees, have hit severe debt problems because of the trade debt owed to them by customers and clients.
On average, these firms – all of which have annual turnover of less than £2 million – are facing trade debt of £68,000, 19% of their average turnover.
By comparison, large firms average trade debt of £2.5 million, but their higher turnover means this is just 15% of their annual earnings.
This statistic demonstrates why, despite the smaller size of their gross trade debt, many of the UK’s smallest companies are actually encountering the most difficult trading circumstances as a result.
Data was collected from over 9,000 real sets of company accounts filed at Companies House, with late payment cited as one of the major driving forces behind the £6.3 trillion of indebtedness in total in 2013-14.
Mark Burgess, chief operating officer of Debt Guard, said: “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, by improving credit flow, this will help put your business on a more stable financial footing.”
Beleaguered micro-SMEs are also receiving the rough end of the deal on late payment, with their invoices on average going further overdue than any other size of business.
At 63 days from invoicing to payment – compared against standard 30-day payment terms – they are waiting substantially longer than the 47 days faced by small companies, and 40 days for medium-sized firms, putting further pressure on their cash flow.