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Understanding Bad Debts and Bad Debt Provision for UK companies

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We can help with serious company debts, HMRC and creditor pressure, VAT/PAYE/Tax arrears, cashflow problems and raising finance.

Understanding Bad Debts and Bad Debt Provision for UK companies

Reviewed: 4th July 2016

If your company’s working capital relies largely on credit sales, debtor balances become a crucial part of the cash flow cycle. When payment is delayed or debts need to be written off, it has serious implications for your business, and can eventually lead to insolvency.

The financial misfortunes of one of your customers will quickly have a ‘knock-on’ effect to your own business, so it’s important to be proactive with your credit management procedures. Credit checking customers at regular intervals, for example, will keep you up-to-date on their financial status.  

Invoicing specialists, Tungsten Corporation, surveyed over 1,000 SMEs in the UK, and found that the average SME was owed more than £40,857 in unpaid invoices, with around half of that amount being overdue for payment.

Although offering credit often generates more sales because of its huge flexibility, the system also introduces a significant risk that needs to be prepared for.

In anticipation of bad debts

Anticipating the likelihood and potential level of bad debts will mitigate some of the risks, as will understanding the cash flow cycle and how bad debts originate.

Businesses with a small customer base are open to the same risk as larger companies if it is not anticipated or well-managed - a single sizeable bad debt can have an equal, if not greater, impact on the ability to survive.

In all cases it’s crucial to seek the guidance of a professional, even if insolvency doesn’t yet appear to be looming. The input of an insolvency expert will help to steer you away from financial failure, and set up a structure to combat the financial issues of your customers.

So what immediate practical steps can you take to mitigate the risk of bad debt, and help your company survive?

Bad debt provision

A provision for bad debt anticipates the likelihood of debtors failing to make payment – essentially it’s an estimate of the potential liability for taking sales on credit. In practice, a percentage of your total debtor figure is set aside in a separate account in the company’s books, and based on historical levels of bad debt.

New companies with no previous data to fall back on generally use bad debt statistics within their own market as an initial guide. The figure is analysed each year, and can be adjusted up or down as necessary.

Obtain professional advice

Real Business Rescue can offer the guidance needed to avoid insolvency. We are business rescue and recovery experts, and will be able to identify your best options for financing, restructuring, or putting in place more effective controls.

We can consolidate and negotiate better terms for your own debt, taking into account any future working capital requirements. If restructuring operations or ownership to streamline the business is more appropriate, this could improve the company’s resistance to the effects of bad debt, preventing a decline into insolvency both now and in the future.

It’s also worth knowing that you may be able to claim VAT bad debt relief if you meet certain criteria – our experts will confirm your eligibility, and advise you on recouping this element of the debt.

Credit management

Efficient credit management helps to identify potential late or non-payers. This begins with credit checking new and existing customers using reports from the credit reference agencies. They indicate the customer’s previous history of payment, whether there are have been any County Court Judgements made against them, and provide a recommended credit rating.

Obtaining bank and trade references may also be useful. Thorough credit checking helps you rely more on the sales you’ve made, lessens the risk of bad debt, and reduces your need to borrow.

Access to finance

Options for finance could include:

  • Invoice factoring and discounting
  • Asset-based finance
  • Crowdfunding
  • Peer-to-peer lending

Even if ‘traditional’ bank loans are available, the types of finance mentioned above could be a better option for your business, becoming part of a general plan for restructure.

If bad debts have caused a significant issue for your company, our experts can help. We have contacts with more than 50 lenders around the country should you need fast access to finance, and can identify opportunities for restructuring your debt.

Real Business Rescue is part of the Begbies Traynor Group – the UK’s leading corporate rescue and recovery practice. Real Business Rescue provide director advice online, over the phone, or in-person at one of our 55 UK offices or a place of your convenience.


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