Home Business News Major causes of small business insolvencies

Major causes of small business insolvencies

by Thea Coates Finance Reporter
25th Jun 24 9:53 am

Bad debts and payment disputes are a top cause of business insolvency, according to Purbeck Insurance Services, which has analysed personal guarantee insurance claims from small business directors, following insolvency.

Failed acquisitions and not being close to business financials due to an over-reliance on accountants, were also major causes of business failure in the past year.

Todd Davison, MD of Purbeck Insurance Services said, “The major political parties agree tackling late payment of invoices should be a priority for any future Government.

Late payment creates a vicious circle of debt down the supply chain and puts a stranglehold on small business growth. Underlining the stress on small business finances that late payment can cause, in Quarter 1 2024, the main reason why small businesses applied for personal guarantee insurance (37% of applicants) was for a loan just to keep their business afloat.”

According to Purbeck’s analysis, a common theme amongst directors claiming on their Personal Guarantee Insurance was also an overconcentration on one or more customers who were late payers

Davison added, “While we wait for the next Government to improve enforcement of the Prompt Payment Code, business owners can continue to tackle late payment themselves by carrying out customer due diligence, ensuring that they invoice promptly and correctly and keeping lines of communication open.

“In acquisitions, firms window dressing their business to make it appear more secure than it can be common.  Again, robust due diligence processes including arranging a financial audit, and scrutinising the validity of future orders is vital.

“Finally, small businesses need to know that if their businesses does fail, a lender is not going to come knocking for the loan to be repaid from the director’s personal assets. This is where personal guarantee insurance plays such a valuable role.  It’s not just there to pay out in a claim, it gives small businesses greater confidence to secure the finance they need.”

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