Another government review aimed at helping stricken Small & Medium Enterprises (SMEs). This time, the Department for Business and Trade has spotted a debt crisis for smaller firms and is calling for them to share their experiences of accessing finance in the UK as concerns mount over repayments.
New figures from UK Finance, the trade association for banking and other funding, revealed a £7 billion drop in net lending to SMEs last year. It’s prompted the government to launch an eight-week probe into backing smaller businesses, including start-ups, which contribute a quarter of UK GDP and around 60% of employment. The concern is that a combination of reluctance to borrow and lack of affordable lending options will hinder national productivity.
Helping to raise awareness of specialist lenders and providing support to plugging the funding gap is useful, but the government also needs to double down on late payments, which remain a major killer in this bedrock of the economy. Trade bodies say these cost SMEs £22,000 a year on average, ultimately leading to 50,000 annual business closures.
Last autumn’s launch of the Fair Payment Code aimed to build on the Prompt Payment Code of 2008, which SMEs generally believe had achieved very little, not even after its post-Covid update which urged a commitment to paying 95% of SME invoices within 30 days. The new code promised ‘medals’: a gold rating to companies paying 95% of all suppliers within 30 days; silver for honouring those terms for SMEs but 60 days for other suppliers; and bronze for paying 95% of suppliers within 60 days.
The intention was to change long term behaviours and break the cycle once and for all; until significant progress has been made and the longer supply chain remains damaged, forget about improved borrowing appetites intentions of SMEs. The liquidity problems in larger companies continue to trickle down, becoming existential liquidity problems in smaller ones. Businesses need cash just to breathe, let alone grow.
The beginning of the end is when they enter into a cycle of robbing Peter to pay Paul, too often in a miserable combination of late settlement with suppliers and non-payment of corporation tax and/or VAT. It’s a scenario seen as much among relatively established small companies as it is among sole traders. It usually ends badly for both, sometimes with personal insolvency or disqualification for directors.
Suppliers to troubled companies must have the confidence to chase payment and enforce their terms, regardless of the perceived risk of upsetting a customer: if a business agreement is too fragile to able to discuss money indisputably owed, then it will invariably lead to a bad debt, at least in part.
All businesses facing severe cashflow pressures should seek professional advice on credit management, invoice discounting, overdraft planning, communicating with HMRC and contractual terms to minimise the impact of late payments.
UK manufacturing
As a leading economic indicator, poor manufacturing figures are a cause for concern, particularly when they spring a major surprise. Output from the UK’s sector fell in the first three months of the year for the first time since 2016. Escalating trade tensions and rising business taxes conspired to batter production at the start of a calendar year, when output is usually higher than in the fourth quarter.
Industry body Make UK’s index of activity fell from +20 to -1 in the first three months. Its balance of employment fell from +8 to -3, the worst reading in four years. Tariff wars have introduced an unforeseen dynamic that changes the equation dramatically, but the perennial debate at government level is a long way from being solved: what can generate earnings outside financial and professional services, or early stage tech development?
Manufacturing’s share of the UK economy is less than 10% today, half of what it was in 1990. Everyone knows that our manufacturers face fierce competition from emerging economies in Asia, primarily China and India, which are able to produce goods more cheaply. Fewer realise that well over 90% of UK manufacturers are SMEs or even microenterprises; relative to larger business in all sectors, they have poorer access to funding, skills, physical space and exporting. The pattern of administrations is all too predictable.
Domestic demand for goods has eased and businesses continue to experience global difficulties that have restricted foreign orders. Conflict in the Middle East and disrupted shipping in the Red Sea remains a concern. In addition, businesses report reduced demand from mainland Europe, notably from France, the Netherlands, Belgium and Poland. US tariffs take the situation to a whole new level.
Manufacturing insolvencies totalled 1,929 in 2024. Roughly flat on 2023, but these latest output figures bode ill.
Manufacturing and engineering businesses considering the insolvency toolkit for an exit route or restructuring, while the decision is still theirs, are welcome to get in touch for a free-of-charge initial exploratory chat.
No spring thaw for High Street chill
Another one bites the dust. Select Fashion is the latest casualty of what seems accelerated momentum in high street retail malaise. The company, which entered into a Company Voluntary Arrangement last year, is heading for liquidation after announcing the closure of 35 stores.
Select follows fellow clothing chain Quiz, which recently fell into administration, closing 23 shops and cutting almost 200 staff. Homebase, already in administration, is accelerating store closures – some of which have been snaped up by CDS owner Chris Dawson – while major supermarket chains have announced sweeping redundancies.
There is no sign of the bloodbath on the high street ending anytime soon, and that’s reflected in the scaled-back investment plans of those retailers still able to fight on. The Confederation of British Industry (CBI) blames generally weak consumer spending, despite higher wage growth, and rising costs. The impact of the autumn budget, which unveiled a £25bn rise in employers’ National Insurance contributions has further dampened retailers’ recovery hopes.
The goalposts keep moving for retail. These are new woes following the crippling increases in energy and raw material costs triggered by the invasion of Ukraine in 2022. It’s little surprise that close to 13,500 retail stores closed in the UK during 2024, according to the Centre for Retail Research, up 28% on 2023.
Even before the first Covid lockdown in March 2020, higher rents and painful business rates for physical stores were driving the retreat of retailers from town centres. They were already struggling to grip structural changes in the sector resulting chiefly from a migration of customers online.
Many left on the High Street or in retail parks are turning to Artificial Intelligence (AI) and automation, such as self-scanning, to battle rising staff costs. The ultimate impact of AI, which is already revolutionising retail warehousing and stock control, is unknown; the ‘given’ is that retailers under pressure need to be quick to adapt where they can, or take drastic action where their problems are existential.
It’s clear that further interest cuts won’t necessarily kickstart consumer spending and generate a more benign retail environment. Those operators intending to survive need urgent strategies for:
- Tenancy and rent issues
- Store closures
- Stock control and working capital
- Technology and operating efficiencies
- Relationships with suppliers
- Trading with international partners
- Banking arrangements
- HMRC ‘time to pay’ plans
Buchler Phillips welcomes ‘no-obligation’ exploratory discussions with managers and owners of retail businesses to cover all the above factors and more.
Insolvency and Fair Competition
The link between unpaid tax and unfair competition is often forgotten; a case arising from a recent public enquiry, involving the Traffic Commissioner for the West of England, provides a good reminder.
Commissioner Kevin Rooney refused PHS Group SW Ltd’s application for a restricted goods vehicle operator’s licence, citing serious concerns over fair competition and tax. The application sought authorisation for 15 vehicles to support the company’s tool and plant hire operations. However, investigations revealed significant overlaps between PHS Group SW Ltd and the recently insolvent Purple Hire Solutions Ltd, including shared business addresses, contact details, operating centres and family ties among directors.
Notably, Purple Hire Solutions Ltd had substantial unpaid tax liabilities, with a shortfall to HMRC of more than £800,000. The company had previously prioritised payments to suppliers over settling its obligations to the public purse, a practice that undermines fair competition and places compliant businesses at a disadvantage.
Commissioner Rooney also noted that Purple Hire Solutions Ltd was connected to a hearing following the insolvency of YHC Hire Services Ltd with a deficiency of £7.3 million. Of that, £5.2 million was expected to be novated to Purple Hire Solutions Ltd, leaving £2.1 million, of which £680,000 was owed to the public purse.
The commissioner emphasised that such practices not only violate legal obligations but also erode the integrity of the industry by allowing entities to operate without fulfilling their tax responsibilities. This behaviour distorts the competitive landscape, disadvantaging businesses that adhere to fiscal and regulatory requirements.
Commissioner Rooney said: “The…business has gained liquidity to the sum of £1.5 Million at the expense of the UK taxpayer. That is clear unfair competition and makes the applicant unfit to hold a restricted goods vehicle operator’s licence. For the avoidance of doubt, it would also fail to establish good repute.”
In light of these findings, the Traffic Commissioner concluded that PHS Group SW Ltd failed to meet the mandatory requirements of fitness to hold a restricted goods vehicle operator’s licence, leading to the refusal of their application.
This decision underscores the commitment of regulatory authorities to uphold fair competition, maintaining a level playing field within the industry. Further information can be found here.
As ever, the Buchler Phillips approach to business challenges is ‘workout, not bail out’. Don’t hesitate to get in touch for an exploratory chat if your business needs help. Addressing the cracks now will, in many cases, avoid the need to start again.
Our helplines below are open for free initial consultations.
Jo Milner 07990 816904
David Buchler 07836 777748
Let’s get to work!
About Buchler Phillips
Buchler Phillips is an independent, UK based corporate recovery and restructuring firm, with an impeccable Mayfair heritage dating back to the 1930s.
Led by David Buchler, former Europe and Africa chairman of global consultancy Kroll Inc, our senior team is equally comfortable advising large corporations, Small & Medium Enterprises (SMEs) or individuals. In addition to decades of experience, each of our Partners brings to any given assignment unique independent insight, free from conflicts of interest, that is often sought but rarely found by clients or co-advisors.
The firm is sector-agnostic, but has particularly strong credentials in property; financial services; professional services; leisure and hospitality; retail and consumer; UK sports; media and entertainment; transport and logistics; manufacturing and engineering; technology and telecoms.
Our activities fall broadly, though by no means exclusively, into financial restructuring, including fraud and forensic investigations; operational restructuring and turnaround; expert witness services and recovery solutions for corporates and individuals.
This newsletter is published for the purposes of general information only and does not constitute advice. Any action taken by readers upon the information above is entirely at their own risk.