With yearly levels of bad debt fast growing for UK businesses, Touch Financial explores the future implications of this trend. Have the figures been overdramatised and if not, then how can businesses secure their finances going forward? Might the Bank of England’s interest rates debate also influence the situation?
What is bad debt?
Before exploring recent trends and comments on the subject, and for the benefit of anyone reading this post who’s new to the world of business finances, it’s worthwhile taking a moment to form a clear definition of the term ‘bad debt’. Put simply, the phrase refers to any unrecoverable funds owed by a debtor which thus hold no value for their intended recipient. In a company context this undesirable situation can easily threaten a firm’s cash-flow, especially – and most worryingly – for any smaller businesses which rely upon transactions from a select number of clients rather than a wider customer-base.
As Investopedia outlines, debts accrue when struggling enterprises write them off after reporting them as income. The most common period for such a series of events tends to be when companies enter a state of bankruptcy, as well as if a creditor charges more to pursue debt collection on a business’ behalf than the amount owned by the debtor(s). While neither of those eventualities would prove welcome to the business awaiting – now inaccessible – payments, the debtors themselves will by no means escape scot-free either, their future credit ratings sure to plummet as a result.
Is bad debt becoming a major problem for the UK?
According to a new study published this summer, wherein the company spoke to 1,000 UK SMEs, the average amount of unrecoverable debts incurred by such businesses now stands at £20,043, a 70% increase on the levels of bad debt discovered in May-June 2016. The Federation of Small Businesses (FSB)’s UK chairman Mike Cherry, speaking to the Telegraph last month, attributed much of the resultant “poor financial security at SMEs” to a “culture of late payments” pervading the country’s current economic market, among other issues which we’ll discuss later in this article.
By no means was this research the only recent showcase of rising unpaid, oft-unrecoverable debts in the UK, either. Take the increasingly controversial funding mechanism of interest-only house loans, a facility which Adrian Anderson, a mortgage broker at Anderson Harris, likened to a “ticking time bomb” in July as news broke of the Council of Mortgage Lenders (CML) discovering that 1.9 million house-owners stood no chance of paying off the capital on their loans anytime soon. Most of those surveyed by the CML confirmed they had either no plan and / or insufficient funds to repay their loans in full, potentially leaving them incapable of taking out loans in retirement as well as hurting those banks to whom the loans belong.
Indeed, multiple financial experts have expressed great concern at such loan issues and other bad debts – not least those tuition and maintenance fees accrued by university students, three-quarters of whom are now expected to never pay off the £50,800 owed on average – potentially worsening a fast-escalating UK debt crisis. The country currently ties with Yemen as sporting the 19th highest debt to GDP ratio in the world, with the Bank of England estimating overall national debt as having reached £1.5 trillion this year. A staggering £1.3 trillion of that amount is thought to have come from mortgages, and the Office for Budget Responsibility doesn’t envision this ongoing economic turbulence subsiding anytime soon, forecasting a rise in household debt to 153% over the next five years.
How can the UK resolve its bad debt crisis?
As one would hope given the circumstances, industry analysts aren’t wasting any time in providing suggestions as to how to deal with the UK economic watershed at hand. Rachel Reeves, the chairwoman of the national business select committee, believes that market regulators such as the Financial Conduct Authority (FCA) – particularly those overseeing the housing sector – should remain “forever vigilant” towards “the growth of some of those issues we saw in the mortgage market in 2008” like unsecured lending. The Bank of England’s financial stability director Alex Brazier has, meanwhile, accused high street banks of having entered a “spiral of complacency”, one from which they must change path in order to safeguard both their own and their customers’ finances in the years ahead.
Yet not every expert has placed the onus on regulators or individual banks to tackle the bad debt crisis, with others claiming that only change on a political or nationwide banking level will enable the UK to overcome its present challenges. For instance, the FSB reported the damage caused by current national business rates for fledgling SMEs since as early as February this year, with doubts since having been cast over the government’s £300m business rates relief fund in the wake of June’s game-changing UK general election. Also under fire is the Bank of England itself, which the Guardian’s economic editor Larry Elliott brands as having “helped to generate” high levels of personal debts via “almost a decade of ultra-low interest rates and copious amounts of quantitative easing”.
Whether the Bank’s strategies will change accordingly going forward remains to be seen, but it’s worth noting that many of its members are already debating changing interest rates right now. While the most recent Monetary Policy Committee meeting saw a 6-2 vote to maintain the current 0.25% rate level, Bank of England governor Mark Carney claimed at the time that this figure could soon rise, most likely before the end of 2017. Such a decision on the MPC’s part could potentially worsen the state of those businesses presently struggling to honour their financial obligations due to insufficient funds.
Perhaps the most insightful take into the bad debt crisis and its potential solutions, however, came from Citizens Advice CEO Gillian Guy, who told This is Money how “vital” it is “that people have access to independent guidance, guidance and support to help them manage their finances.” It’s here where Touch Financial comes in. Whether your firm has operated in its chosen sector for decades or only started business last year, bad debt remains a potent threat to your cash-flow either way, but through our credit protection services, we can provide information as to how to ensure debtor insolvency doesn’t ruin your bottom line, recouping potential losses rather than the funds becoming completely unrecoverable.