Too many SMEs still working on a knife edge

I recently read Legal & General’s ‘State of the Nations SMEs’ report, and was disturbed by their finding that 53% of new companies would last less than a year after a 'critical event' like losing an employee to illness.

Part of the problem, as L&G sees it, is that the number of SMEs in debt has risen by 33% since 2011 – and too few have insurance in place. That’s certainly a factor, but I believe the problem runs much deeper.

Identifying the problem

Debt is not intrinsically a problem. Research suggests that access to funding speeds growth – something the Bank of England is at pains to support. The problem is how we manage the risks connected with debt.

Registering a limited company reduces the risk to owners, but lenders, suppliers and clients usually want personal guarantees. While that’s understandable, it puts enormous pressure on the viability of the business. This can encourage owners to focus on the immediate need to service debt, rather than planning for better cash flow in the long-term.

Reframing the solution

Safeguards like critical illness cover can be a lifesaver. But rather than simply trying to encourage uptake, we need to think about how we can empower entrepreneurs to make the right decisions from day one.

These kinds of cover simply aren’t offered to new businesses early enough and the benefits are not made absolutely clear from the start. We need more advice and support for our SMEs. If owners knew they had this safety net, it'd immediately reduce the pressure on them and free them to make clear-headed, long-term plans.

Lenders must take more responsibility in advising their clients – and organisations like Chambers of Commerce, debt advice charities and trade bodies should be much more proactive. Debt is a fact of life when it comes to running a business and we need more awareness on how to control and manage debt effectively.

Building systems, not safeguards

We could also help make safeguards like insurance less critical by ensuring SMEs are aware of the systems, software and support available to help them manage their debt.

For example, carrying out credit checks on potential clients and suppliers seems to be overlooked by new businesses. It’s as if they’re embarrassed by the need to check out their trading partners, or frightened of scaring them off. This should not be the case.

Terms and conditions should be the byword for doing business, not something that’s considered only once a problem has been identified. Getting paid can be virtually impossible if you have done business without first setting out the boundaries.

With these as a foundation, companies can consider systems like automated invoicing or debt enforcement plans from sensitive partners like Dukes. These are the kinds of tools that can prevent, catch or address cash flow problems before you need to resort to insurance claims.

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