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Bad debts for SMEs – what are the early warning signs?

bad credit good creditAlthough the economic situation is improving, SMEs should be doing more to protect themselves from bad debt and late payments from customers. Recent research conducted by Bacs revealed that more than three-quarters (76 per cent) of UK businesses are being forced to wait at least a month beyond their agreed contract terms before getting paid. While a report from Satago showed that more than a third (34 per cent) of UK SMEs say they write off thousands of pounds of bad debt every year.  Although the Small Business, Enterprise, and Employment Act has addressed the issue of payment practices and policies, and aims to reinforce the voluntary Prompt Payment Code, SMEs should be aware of some of the signs of bad debt so they can make better-informed decisions before entering into a commercial agreement.

Large, first-time orders

Although large orders from new customers are something to be welcomed, it is important to do all the necessary credit checks before accepting the order as it can be a warning sign of a potential fraud.  Ask common friends and other customers – they may have some inside information or have heard trade rumours. Consider asking for a payment up front or on a pro forma basis. If you can, take payments by credit card but if they try a number of cards, it is a classic example of a fraud.

A question of loyalty

If your customer has always been loyal to a competitor, then ask yourself why they have changed. It could be that they have hit their available credit limit.  Similarly, if there seems to be a lack of employee loyalty, with accounts staff changing on a regular basis, then that too is often a sign that the finances aren’t in good shape and that they are choosing to jump ship once the true picture starts to emerge.

Late payments

If the customer breaks the terms of payment, pays late or continually makes excuses, then be wary about extending credit for a second time.  It is likely that they are suffering from cash flow problems, and payment will therefore depend on factors outside your control.

Multiple enquiries from credit providers

Receiving lots of enquiries from other credit providers about creditworthiness should also set alarm bells ringing.  While it may be an indicator of growth, it may also signify that they are in financial difficulties, and so it is best to adopt a cautious approach.

New financing

Changing banks or getting new financing is a classic early warning sign.  Monitor the situation closely to determine if the new financing is forthcoming. It may be the case that they are looking to acquire funding due to planned expansion, or it could be that they are experiencing difficulties and are therefore best avoided.


Achieving the right balance between retaining customers, getting new business and ensuring a healthy cash flow can be tricky. By staying alert to these early warning signs, businesses can actively reduce the risk of falling prey to bad debt. If debts do build up and are not recovered despite persistent chasing, then speak to professional advisors who can act on your behalf.