Despite the rising insolvency rate, fewer than half of SMEs actively credit check new customers.

The latest rise in corporate insolvency as reported by the Insolvency Service has reaffirmed that it is vital for businesses to be cautious when offering credit to firms.

Hilton-Baird Collection Services’ most recent Late Payment Survey highlighted that late payment remains an issue for small businesses.

However, despite the rising insolvency rate, fewer than half of respondents actively credit checked new customers (47%) in the second half of 2011, with fewer than one in three credit checking existing customers (30%).

Consequences

The consequences of late payment are well documented, with the annual survey additionally finding that businesses had to wait an average of 17 days beyond their agreed credit terms to be paid in that period. A result of this is that 32 per cent of businesses now classify more than 10 per cemt of their debtor book as bad debt.

Unfortunately, late payment has also had a knock on effect down the supply chain which only exacerbates this problem further. Well over half of businesses admitted to paying their suppliers later (59%) as a result of their customer paying an invoice late.

Reasons for late payment

Meanwhile 34 per cent said that the single most common reason for late payment was that they are waiting to be paid by their own customers.

However, for 13 per cent of respondents the most comment reason for late payment was that their customer simply couldn’t afford to pay. This provides the biggest cause for concern as the financial health of SMEs continues to be under increasing pressure.

Alex Hilton-Baird, Managing Director of Hilton-Baird Collection Services, commented: "The findings of our Late Payment Survey serve to highlight just why it is so important for businesses to do all they can to ensure that they have run the necessary checks on their customers before agreeing to supply goods or services on credit.

"Our experience has found that corporate insolvency is a persistent problem which historically escalates until long after a recession. Worryingly we’re seeing that it’s a trend which is likely to continue for the foreseeable future.

"It is our hope that businesses really look to safeguard their cash flows against the trend of late payment in the coming months by taking all the vital precautions. Then, in the eventuality that late payment does occur, businesses have all the resources at their disposal to ease the knock on effect businesses so commonly experience."