Surge in bad debt piles pressure on SME supply chains

The value of bad debt suffered by small businesses has surged by a staggering 127 percent, according to a report by SME funder, Bibby Financial Services (BFS).

According to the latest SME Confidence Tracker, businesses have written-off an average of nearly £40,000 in unpaid invoices in the last 12 months, up from an average of £17,500 in the spring. The proportion suffering from non-payment has risen too, reaching 40 percent, up from 30 percent in March.

Ahead of the introduction of the Government’s Fair Payment Code, the figures points to considerable supply chain pressure caused by late or non-payment by customers.

Jonathan Andrew, Chief Executive Officer of Bibby Financial Services said: “This is a supply chain disaster waiting to happen for SMEs, as well as a huge economic leakage.

“While late payment is a known challenge, bad debt, where unpaid invoices are written-off entirely, is a hidden assassin that can wreak havoc through SME supply chains.”

Data from the Federation of Small Businesses show late payment leads to 50,000 business closures a year. Despite a 9 percent drop between July and August 2024, corporate insolvencies remain higher than pre-pandemic levels. This is echoed in BFS’s data, with more than half of SMEs seeing at least one supplier (58%) go bust in recent months, and a similar proportion experiencing the insolvency of at least one customer (56%).

These findings are echoed by the Asset Finance Connect UK asset finance outlook survey, where members anticipate a further increase in defaults over the next six months.

Jonathan Andrew added: “Measures announced by the Government such as the Fair Payment Code are welcome, but the reality is that it’s not only larger businesses that pay late. Many small businesses do so through necessity or to preserve cashflow to make critical payments, so we really need to be looking at how to inject working capital into supply chains sooner to insulate smaller businesses, as well as reducing payment times.

“It’s also critical that Government measures draw the distinction between late payment and the lesser understood issue of bad debt due to non-payment or protracted default. This can so often be devastating – not only to the creditor, but to those businesses within their supply chains.”

The SME Confidence Tracker Q3 2024 report can be downloaded here.