Bad Debt Equals Big Problem for Small Business
Bad Debt Equals Big Problem for Small Business
- Companies are leaving themselves wide open to bad debt, with 33% having no credit-checking procedures in place at all.
- The majority of businesses make credit decisions based on reputation, intuition and personality.
- A fifth of companies see between 2% and 20% of annual sales end up as bad debt.
A new survey, released today at the launch of checkSURE's new online credit checking service, found that UK's small and medium-sized enterprises are exposing themselves to severe bad debt problems by failing to undertake effective credit checking procedures. Over a third of respondents offered credit to potential trading partners on demand, without undertaking any measures to ensure that the company in question is creditworthy. Furthermore, the survey found that where companies are aware of the bad debt issue, they rely on unscientific methods when deciding who to offer credit and, more importantly, what credit limit to assign.
The research showed that half of those surveyed made decisions regarding credit based on the reputation of the company concerned, 42% relied on their intuition and 41% looked at the personality and trustworthiness of the senior individuals in the company. These informal and intangible techniques far outstrip the use of more scientific, fact-based credit checking procedures. Only 15% of the businesses surveyed commissioned detailed financial reports on the company being considered for credit and 81% said that they never used a credit checking agency to get a credit opinion on potential clients.
This lack of effective credit management means that bad debt is a serious issue for many companies - more than one in five companies see between 2% and 20% of their entire annual sales end up as bad debt. Worryingly, the survey found that companies view bad debt as an issue to be cured after the fact, rather than preventing it occurring in the first instance. When asked what would enable them to manage bad debt more effectively, 47% of respondents think that Government legislation would help them deal with the issue of bad debt. Legislation such as VAT relief on bad debt can only be effective after the fact and is no match for preventative measures at the outset. However, some companies are aware that more accessible information could be beneficial in terms of managing bad debt, with 39% and 36% of respondents wanting more details on late payment and credit status respectively.
Neil Jones, Managing Director at checkSURE commented: "With bad debt resulting in over 10,000 companies going bankrupt in the UK every year, according to the Department of Trade & Industry, it is a worry to find that small businesses are doing little, if anything, to protect themselves. Bad debt is a tremendous problem, particularly for small businesses, as a long delay or failure in paying invoices can cause large enough cashflow problems to cause a company to fail. The Department of Trade and Industry estimates that at any one time small and medium sized businesses are owed £6.8bn in late payments. Although the new Late Payment legislation from the Government is a welcome measure, it fails to address the key issue - prevention is better than cure.
"As our survey has shown, businesses are only aware of the issue of credit management when it actually turns into a debt problem. Although factors such as the reputation of a potential trading partner do have some bearing on its creditworthiness, in actual fact there are 1000s of variables that effect how much credit a company should be offered, if any at all. SMEs need to realise that it is far more effective to use rigorous, financial methods to prevent bad debt. With the launch of checkSURE's new online credit checking service, it is our aim to make credit information for SMEs "triple A rated" - affordable, accurate and accessible."
The new web-based service delivers clear, predictive credit reports and instant updates direct to the desktop and is optimised for a 56k modem connection.
checkSURE electronically delivers comprehensive credit information, and monitors current and potential trading partners on their future creditworthiness. As an integral part of the online service, checkSURE provides an Augur score for each company doing business with the user's organisation. The Augur score evaluates data provided by Graydon UK Ltd. from multiple sources and provides an objective assessment of the future risk of the business experiencing financial difficulties in the next 12 months, in comparison with other UK businesses.
checkSURE offers continual and intra-day monitoring and sends credit score updates directly to the desktop. In addition to the Augur credit score, checkSURE also delivers a monthly credit guide, as recommended by Graydon, that might be offered to any particular company, limited or unincorporated.
This saves companies granting credit time and effort in compiling and assessing data from multiple sources. Scoring introduces greater objectivity and consistency as part of a well-controlled decision process, giving online users the ability to manage risk exposure with a greater degree of accuracy and in line with their overall business goals. For example, more informed decisions can help users to reduce bad debt and offer more appropriate pricing in response to higher credit risk.
The Augur score is a credit risk assessment tool, which has been jointly developed by Graydon UK, Ltd and Fair, Isaac and Company, Inc. Its distinct advantage is its combination of Fair, Isaac analytic technology and expertise with Graydon's comprehensive database.
Whatever the size or type of enterprise the Augur score will help to bring consistency and accuracy to the credit decision, thanks to the underlying models developed for both incorporated and unincorporated businesses by the world leader in predictive analytics and decision technology, Fair, Isaac. checkSURE can provide credit scores for unincorporated and limited companies, including those who have yet to file their first set of accounts.
The checkSURE service leverages the database power of Graydon, the leading provider of company information to the UK credit insurance industry. The score commentary puts user decisions in the context of other businesses across Graydon's whole database. Additionally, users have the ability to review more detailed, key data, such as legal information, balance sheet data or county court judgments.
checkSURE is the first and only commercially available service in the UK to provide this vital and comprehensive information through a dedicated ECommerce platform.
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