BUSINESS can only pay its creditors if it has sufficient cash coming in.

A 2022 study by Barclays found that 58 per cent of SMEs in the UK were waiting for late payments.

Intuit Quickbooks estimates that SMEs spend 56.4m hours chasing debts, worth more than £6.3bn to the economy each year. Laura Keegan, senior associate solicitor and insolvency expert at Muckle LLP, discusses the importance of spotting early warning signs.

It is more important than ever for directors to know the early warning signs, both within their own businesses and that of their customers. Many directors don’t appreciate that failing to pay debts as and when they fall due is a legal definition of insolvency. This can have serious impacts on their statutory duties to the company and its creditors.

A director cannot be personally liable for company debts (a supplier couldn’t pursue a director personally for an outstanding invoice). However, if a director fails to act in the best interests of the company or its creditors, there can be personal liability to compensate the company for any losses. Sometimes things are outside of your control. In a world where economies are so interconnected, regular monitoring and due diligence is vital.

Most of us are very, very good at getting to know our clients and customers at the initial engagement phase, but rarely continue that due diligence after contracting. That’s not to say that everything is hopeless! As with any business risk, small steps to establish effective internal procedures and policies do help. This can include:

• Having a robust set of terms and conditions, which clearly set out your invoicing and collection policy.

• Understanding the early warning signs of financial difficulty within your sector.

• Having a clear internal invoice collection procedure, so that overdue debts are sent out to a reputable invoice collection team; specialists in recovering overdue debts without damaging those important commercial relationships.

• Implementing ongoing monitoring and due diligence in respect of the financial position for key parties in your business, whether customers or suppliers, and understanding your rights as a creditor.

If you are ever concerned about the financial position of your business, seeking specialist legal and accounting advice early is key, but you can only seek that advice early if you are alert to the risk.