Bad debts and payment disputes are the biggest causes of business insolvency, according to Purbeck Insurance Services, which analysed post-insolvency personal guarantee insurance claims made by small business owners.
Failed acquisitions and an over-reliance on accountants to keep track of the business's financial health were also major reasons for business failures last year.
Todd Davison, managing director of Purbeck Insurance Services, said: “The main political parties agree that tackling late bill payments should be a priority for any future government.”
Late payments create a vicious cycle of debt throughout the supply chain, stifling the growth of small businesses. Highlighting the stress that late payments are putting on small business finances, the leading reason small businesses applied for personal guarantee insurance in the first quarter of 2024 (37% of applicants) was for loans to stay afloat.”
Purbeck's analysis shows that a common theme among directors making personal guarantee insurance claims is an over-concentration on one or more customers who are behind on payments.
“While we wait for the next administration to improve enforcement of the Prompt Payment Code, business owners can continue to address late payments themselves by conducting customer due diligence, issuing invoices promptly and accurately, and keeping channels of communication open,” Davison added.
“In acquisitions, companies disguise their operations to make them appear more secure than usual. Again, a rigorous due diligence process is essential, including arranging financial audits and scrutinizing the validity of future orders.”
“Finally, small businesses need to know that if the business fails, lenders won't come calling demanding loan repayments from the owner's personal assets. This is where personal guarantee insurance plays a key role. It's not just about making sure claims are paid when made, it gives small businesses the confidence to secure the funding they need.”