UK SMEs battle challenges amidst late payment woes

Despite continued cost issues such as rising borrowing costs and the scourge of late payment, the resilience of the UK's small business community remains.

Purbeck Personal Guarantee Insurance studied directors and owners of small businesses across the United Kingdom and discovered that 78 per cent of small firms are currently profitable. While one in five (19%) are breaking even and 44 per cent are in the black by a small margin, more than a third (34%) are profitable. Only three per cent are losing money and one per cent are on the verge of going bankrupt, the research revealed.

However, the road to profitability has not been simple, as, in addition to overall economic uncertainties, 81 per cent of business directors report being affected by the scourge of late payment. A quarter believe the constant aggravation of late payment has gotten worse in the previous year, and five per cent of business directors in the poll say it has a substantial impact on their business.

Purbeck's findings come as the Federation of Small Businesses (FSB) continues to urge the government for stronger measures to hold large corporations accountable for the pervasive problem of late payment.

Despite government support for energy bill relief and the current Energy Bills Discount Scheme (EBDS), popular tactics among small business owners to help manage costs and cash flow have included reducing energy use and cutting employee pay raises, despite the fact that only seven per cent of those polled have taken a pay cut themselves.

Purbeck Personal Guarantee Insurance Managing Director, Todd Davison, commented on this, saying, working with small business leaders comes as no surprise that many continue to overcome seemingly insurmountable obstacles. He mentioned the growing trend of using personal guarantee insurance to mitigate the risk of a personal guarantee-backed loan. This is only one example of how directors and owners are strengthening their resilience, he added.

According to Davison, when considering new financing, it is prudent to prepare a personal guarantee request from the lender. He further said that personal guarantee insurance ensures that, should the business fail, the responsibility is not entirely on the shoulders of the owners and directors. It's one less worry at a time when small business owners have so many other issues to consider, Davison added.

Another survey by Purbeck Personal Guarantee Insurance revealed that more than a third (34%) of small and medium-sized enterprises (SMEs) owners have put their life savings and home on the line for their businesses by signing a Personal Guarantee for a business loan, highlighting the high stakes involved in being a small business owner in 2023.

The research revealed that they risk losing all, if their business fails. Furthermore, the report found that 15 per cent of those surveyed expect to be a personal guarantor for a business loan within the next year. The results of the survey show how challenging it has become for SME owners to secure funding without taking the necessary step of signing a personal guarantee.

The survey further discovered that while half of small firms aim to seek new financing this year, 53 per cent of these small business owners are borrowing to improve cash flow and 42 per cent require the money to pay off existing outstanding debt.

The survey revealed that raising cash in a weak economy is difficult, and while 43 per cent plan to seek finance from a traditional lender in the form of a business loan, 28 per cent plan to use credit cards and another 28 per cent plan to utilise overdrafts to help fund their business. Furthermore, one in every five people (21%) will approach friends or relatives for money.

"In today's turbulent economy, it will come as no surprise that small business owners are seeking additional finance," Davison said, adding that it has been increasingly difficult for a small firm to secure capital without a personal guarantee requirement since the Pandemic.

According to him, it is critical that business owners thoroughly understand the dangers associated with signing a personal guarantee, as well as how to mitigate them. This can include anything from sharing the risk to obtaining personal guarantee insurance to help settle the bill if the firm fails, he added.

So far in 2023, Davison noted that more SME owners have applied for personal guarantee insurance (PGI) to limit the risk of business failure than at any other time.