Phil Hobden takes a look at the debt crisis facing SMEs and how the rise of alternative debt resolution services are providing less risky options for businesses to recover monies owed to them.
64% of SME business owners fear that late payments could result in their business going bust in the near future. Quickbooks Online 2021
The traditional dispute resolution model has been heavily stacked against SMEs for a long time now, with UK businesses being forced to write off more than £40 billion each year.
Yes. £40 billion. In fact 70% of ALL SMEs (that’s YOU) will have at least one type of commercial dispute every three years with 96% of SMEs having had an experience of bad debts.
And guess what… it’s set to get worse. Late payments and unpaid invoices have always been a problem but COVID-19 has increased the time to pay and risk of debts turning bad. Recent data shows late payments spike each month-end as we went into this crisis and companies managed the downturn. As the economic recovery begins, the recovery of debts owed will become vital to many SMEs, particularly as the government continues to ease its rescue measures.
The challenge is how do you deal with these? Well, the honest truth is 89% of SMEs faced with an unrecovered bad debt that needs disputing will not instruct a lawyer, citing reasons such as widespread dissatisfaction with the traditional litigation process, high court and legal costs, lack of trust and a heavily defendant-biased.
It’s also really stressful. A few years back I helped my father-in-law in a dispute against a warranty company. He purchased what he thought was a 5 Star warranty (in fact it was even called that) for his new company vehicle, assuming that it would cover him for whatever went wrong. And in theory that’s what it should have done. However when his engine blew up at 70 MPH on the motorway and he tried to claim for the repairs, it became clear very quickly that this was 5 star in name only. They refused the claim. He appealed. They refused the claim again. And then they stopped talking to him completely. He was left with no option than to take the case to court.
The warranty company threw everything they could at it – from a high cost local law firm to an even more expensive £300 an hour barrister. We had Google as, rightly, my father-in-law was unwilling to match their open cheque book. But due to our misunderstanding of the process and a few mistakes along the way we even managed to be liable for costs if we lost. Amazing what an incorrectly ticked box on a form can do. So, a £9k loss for a new engine could easily have been a £30k+ loss if the case didn’t go our way. We won but the process took 6 months and even then, we only got back £5k of the total owed. Then they appealed. Another 3 months passed. Again we won. But again that wider liability was still there. So 9 + months passed but the stress was considerable. Not to mention the time taken to prepare the multitude of court documents and witness statements.
It’s cases like this that force many small businesses to simply write off ‘good debt’ or to not pursue otherwise viable claims rather than try to become Google lawyers or spend costs they may not be able to recover. This is leading to 1 in 10 clients failing to pursue debts in excess of £100,000.
So, if traditional methods are so onerous, what options DO you have? Well, much like the wider lending market, dispute resolution has changed a lot over the past 10+ years. Whereas previously you would have to pursue this on your own, an increase in alternative debt resolution (ADR) services have opened the door to a less risky way to recover funds.
How does ADR work? Well unlike direct litigation there are other stages that can see the case resolved quicker.
Mediation
This is the most common form of ADR. A trained mediator then meets the parties separately and shuttles between them, trying to develop common ground and testing out ways of resolving the dispute. Until a settlement is achieved, the mediation process is non-binding and the parties are free to walk away.
Expert opinion
The parties appoint an agreed expert and ask them to consider particular points of dispute between the parties, usually of a technical nature. If agreed in advance to have these conclusions binding, this can be a good way to resolve more technical disputes.
Adjudication
Adjudication is a statutory procedure by which any party to a contract has a right to have a dispute decided by an adjudicator. This tends to be more costs effective than direct litigation and can be quick – less than 42 days. The final adjudication is binding, usually being upheld by courts.
Mini trial
A more formal type of ADR, a mini trial (also known as an ‘executive tribunal’) sees a panel engaged which comprises a mediator and a senior executive from each party who will try and resolve the dispute based on the evidence presented.
Alternative debt resolution providers usually work on a no win no fee basis also, meaning that there would be no cost to you until the case is resolved. On average an ADR service could return 40% more to you than if you pursued the case yourself (and won).
But even before this you can help yourself by leveraging the technology open to you. According to research by Quickbooks Online only 11% of SMEs have used any type of accounting software to automatically chase late payments of invoices since COVID-19 started. But ledgers like Xero, Quickbooks and Sage (others as well) have inbuilt ways to manage this automatically, as well as more linked services like Chaser or Debtor Daddy. Equally your accountant may be able to suggest services, software, or solutions to help get payment before escalation is needed. After all, 49% of SMEs will now go to their accountant for support around financial matters after the banks and more traditional routes have stepped back from supporting this.
One thing that COVID has shown us is that today, more than ever, SMEs need help from their trusted advisers to navigate out of the continued choppy waters of the current UK economic situation…
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