A growing number of small businesses are simply closing down and abandoning their debts to avoid the associated costs of formal insolvency.
By Tracy Ewen, IGF
There is considerable dispute over insolvency figures at present, with some statistics suggesting that insolvency numbers are falling, while others find the complete opposite. Regardless of how the statistics read, they do not reveal the entire insolvency picture. This is because many SMEs find the costs and complications that are associated with registering as insolvent too great and as such, choose the easier option of ‘ceasing to trade’. With many banks still reluctant to lend to SMEs, small companies that are struggling with their finances are simply choosing to shut up shop and walk away from their debts. ‘Cease to trade’ has become more and more common among UK SMEs over the past few years. This is something that does not show up in any of the insolvency statistics and is bad news for both creditors and businesses alike.
Let’s look at the insolvency stats more closely. Conflicting evidence from various sources dispute the state of insolvencies in the UK. The latest PricewaterhouseCoopers (PwC) analysis into corporate insolvency numbers demonstrates that the decline in the level of insolvencies witnessed in 2010 has continued into the first quarter of 2011. In total, 3,657 companies were announced to be insolvent in the first quarter of 2011, compared to 3,829 in the last quarter of 2010 (a 4.5 per cent decrease). Statistics show that the level of insolvencies fell by 14 per cent compared to the first quarter of 2010. Other data suggests that corporate administrations in England and Wales have increased by 22 per cent in the first quarter of 2011.
Whether the insolvency statistics are showing an increase or a decrease in the number of companies registering as insolvent, the numbers are masking the growing problem among small businesses of those which are simply closing down and abandoning their debts to avoid the associated costs of formal insolvency.
So what can be done about this problem? Firms should attempt to seek professional help before they get to this stage and while a non-viable business should not try to keep going, many genuinely good firms are not getting the second chance that they really deserve. In challenging economic times, companies need to manage their cash flow carefully and should consider other finance options to plain vanilla bank lending, such as invoice finance. This is effectively a cash advance on all invoices raised to enable SMEs to manage any potential cash flow problems that might be occurring.
I'm finding the number of businesses choosing to shut up shop is on the increase. Some of these are weak businesses that cannot survive, whatever the available financing – but many are struggling as a direct result of business managers being unaware of suitable cash flow options and failing to seek professional advice. A lack of tangible assets is also reducing the number of companies being bought back out of administration by company directors, compounding the problem.
Insolvency costs are an issue. The cost of insolvency for small businesses (a minimum of £5,000 and often significantly more) is acting as a real deterrent for firms to seek help or enter insolvency proceedings. This can have substantial ramifications on other businesses that may find themselves suffering a financial loss if another business that owes them money does not wind up its affairs correctly. Some businesses may also wait until a creditor winds them up or the government shuts them down as a result of not having filed accounts for several years – again, this is behaviour that could really be skewing the insolvency statistics.
Before ceasing to trade or entering insolvency proceedings, business owners should make sure that they really have exhausted every option available to them. If we are to move out of a stagnant economy, it would help our country's cause if more businesses persevere to get their cash flow back on track.
See also: Are you ready to trade online?Cash flow, IGF, Insolvencies