Medium-sized firms most at risk of insolvency exposure

More than 100,000 UK businesses owed money from insolvent companies in 2015, according to trade body R3

Medium-sized businesses were the most likely to be exposed to other firms' insolvencies in 2015, according to new research from insolvency professionals trade body R3.

The research, which was based on R3's Business Distress Index which surveyed 500 UK businesses, found that 14 per cent of medium-sized firms (which employ 51 to 250 staff) were owed money in 2015 by an insolvent company.

In total, R3 found that 113,000 UK businesses were owed money by companies going into insolvency procedures last year.

Phillip Sykes, R3 president, said medium-sized businesses are prone to omitting the required checks, which often leaves them exposed.

"Growing businesses encounter two classic problems: going for growth by taking on new customers without properly checking their creditworthiness; and a lack of controls to monitor their exposure," he said. "This leaves growing businesses, particularly medium-sized ones, as the most at risk of being exposed to others' insolvencies.

"Although the UK insolvency regime is ranked as one of the best in the world, it is often the case that those owed money in insolvencies won't see all their money back. This can have a serious impact on their own finances."

R3's research also found that four per cent of large companies (more than 250 employees) were creditors to an insolvent company in 2015.

This compared with between five and seven per cent of businesses employing one to 50 staff. Sykes said that small firms can be particularly damaged by owing money to insolvent parties.

"Credit control can be a real problem for smaller businesses," he said. "They might be selling goods or services, but it can be difficult for a small or growing business to make sure it actually collects what it is owed.

"When you have a small company exposed to more than five different insolvencies, there is a cause for concern. There could be real cashflow issues there.

"Businesses need to be savvy about who they trade with. If a business isn't paid upfront or on delivery, or pays in advance for its own supplies, it is essentially lending money to those with whom it is trading. This sort of 'lending' doesn't have the same protection in insolvency situations that secured lending, such as a mortgage, enjoys."