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The impact of SME debt on the economic recovery

Last week, billionaire hedge fund manager Crispin Odey aired some controversial views about the state of the global economy and the risk of a serious recession. Debt was central to his damning verdict.Business man

Boom and bust

Speaking to The Guardian, Odey argued that for the past 60 years recessions have been short because lending expanded quickly afterwards. This time, however, that expansion has been negligible, putting the global economy at risk of short, unpredictable boom-and-bust cycles like those suffered by Japan over the past 20 years.

The central banks have already put interest rates down to zero but, Odey says, this is the last trick they have to stimulate growth, and it's not looking good. But why isn't it working? In the case of SMEs, a study by the University of St Andrews and the London School of Economics and Political Science suggests that it could be a combination of lack of trust in banks after the credit crunch and a resistance to handing control of the business to outside influences.

This assessment fits with the government's approach and the European Commission's plans to set up a Capital Markets Union to remove barriers to cross-border assessment, both of which seek to encourage SMEs to borrow more. But this doesn't address one of the key problems.

Tackling mounting debt

Credit supply may be crucial to healthy cash flow for British SMEs, but mounting debt is a serious risk. Last year the International Business Times reported that UK SME debt in trade averaged £1.3m per company, and the Institute of Business Ethics warned that late payment practises were rife.

Instead of simply taking on more debt, we at Dukes Bailiffs believe that businesses should address these core issues by taking a more proactive approach to their cash flow by managing financial timelines and, in particular, approaching their debtors as soon as possible.

As well as attempting to claw back debts, this proactive approach means SMEs should be realistic in writing off bad debts too. This is in line with what Odey advises we do for the greater good of the economy. For advice on taking control of your debt, visit our Contact Us page.

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