SMEs should take heed of the Government turning its attention to tackling corporate debt caused by COVID-19 and act now to protect themselves against unpaid invoices.

UK Government has provided guarantees for banks to lend in excess of £45billion during the pandemic. Having delivered such financial support, which is likely to grow further in the coming months, the Treasury is now concerned about how such high levels of corporate debt will be repaid and the risks this presents to business survival.

Financial services industry lobby group TheCityUK estimates there could be between £97bn to £107bn of unsustainable corporate debt in the UK by March 2021, with as much as £40bn being held by small businesses. This increases the risk of company failures, leading to a long trail of insolvent debt.

Mark Halstead, partner at business intelligence and financial risk firm Red Flag Alert, says: “Our recent analysis shows there’s over half-a-million firms in the UK in significant financial distress. This is the highest level since we started records in 2004 and we know that on average 3% to 4% of these struggling companies typically fail each year. This means that very conservatively around 20,000 companies could go out of business this year.

“The failure rate could be much higher due to rapidly increasing levels of unsustainable debt. SMEs really need to take decisive action now to protect themselves against the risk of unpaid invoices.”

In particular, small and medium sized businesses must be aware of debtors using the pandemic as an excuse to stall payments which they may not be in a position to pay. Sadie Butler, head of commercial debt recovery service Forbes Collect, explains: “There’s been a lot of positivity and understanding amongst businesses during the pandemic. Creditors have been more flexible with payment terms to provide debtors with breathing space to cope with the disruption and revenue losses of the pandemic. However, with Government outlining the end of its different support measures, we’re now at something of a tipping point where companies will realistically know if and when they can fulfil their financial obligations.

“SMEs should be speaking with debtors and seeking absolute clarity on when they will be paid money owed. If this isn’t forthcoming or payment dates are missed, businesses shouldn’t be concerned about deviating from the accommodating approach they’ve taken during the pandemic and taking legal action to recover cash. Excuses and stalling payments are tell-tale signs of a debt at high-risk of going unpaid.”

Businesses can take a number of steps to collect debts, from third party debt orders, to winding up petitions and pursuing oral examination hearings. Looking beyond the recovery of outstanding payments, SMEs need to take more proactive steps to protecting themselves against high-risk debtors from the beginning of the marketing or sales process.

Mark Halstead adds: “SMEs should really take the same approach as a financial lender when it comes to selling products and services and offering credit terms. A bank properly checks the credit rating of a borrower before deciding to lend them cash and sets borrowing terms according to risk levels. It should be no different for an SME when they are deciding whether to do business with a customer or supplier. The number of businesses in significant financial distress is growing and SMEs need to ensure they are fully aware of whether they are entering into an agreement with an at-risk business which may not be around in the coming weeks or months.

“SMEs can access real-time data that provides an accurate view of a company’s financial health. This can be used to evaluate risk and make practical decisions such as requesting payment ahead of goods or services being delivered.

“Data will prove key in the Government’s approach to recovering COVID-19 debt, while creating an economy that helps commerce to bounce back. A same data-led approach will prove the difference in enabling SMEs to protect and grow their businesses in a market saddled with record levels of debt.”