Long, cold winter looms for SMEs

Authored by ARAG Head of Sales and Marketing Andy Talbot

If this summer has been nothing to write home about, the signs of a difficult winter ahead are ominous.

A few positive economic indicators may look like light at the end of the tunnel, but a deeper dive into the data reveals various pitfalls that SMEs must avoid if they are to survive into 2024 unscathed.

While most businesses have done all they can to mitigate interest rates, energy prices and other rising costs, the need to manage legal risks and maintain healthy cashflow will be critical to riding out the economic storm.

Till debt us do part

Relentlessly climbing interest rates have hit homeowners hard, but businesses have to manage their own costs while also facing customers with severely reduced spending power.

Data reported by the Insolvency Service show the number of registered companies becoming insolvent has been increasing steadily since 2020.

The number of insolvencies in the first half of 2023 was more than double that in the same period of 2021 and 40% higher than 2019.

This widespread squeeze on finances has increased the risk of bad debts that few can afford to carry in such challenging times.

Chasing overdue accounts is a thankless and time-consuming task, but following the right processes – and having the legal muscle to back them up – can make all the difference.

Contract killers

Tough economic times also see an increase in contract disputes that weigh heavily on cashflow.

Court backlogs are compounding the problem for businesses. Even the small claims court, which supposedly offers a swifter, simpler route to justice, is seeing cases take a year to resolve.

Larger, “fast track” and “multi track” claims are averaging almost 80 weeks between the issue of proceedings and a hearing.

Fortunately, there are other routes to justice. ARAG has long championed alternatives like mediation in civil cases, which offers a less adversarial, cheaper and swifter option than a trial.

Sometimes, even mediation isn’t necessary, where sound legal advice and careful communication can make the legal position clear to a difficult customer or supplier.

Redundancy warnings

After a huge spike in redundancies early in the pandemic, data published since has been largely positive, with employers struggling to recruit and retain staff, rather than laying them off.

However, redundancy numbers have been climbing steadily, despite the tight labour market, and indicators suggest this trend will continue.

The insolvency service also reports on firms planning at least 20 redundancies. Data published in August suggest that numbers have been increasing since December 2021.

Planned redundancies reported to the Insolvency Service in the first half of 2023 were up more than 50% on 2022.

Whatever the circumstances, making employees redundant brings its own risks and getting it wrong can be damaging and expensive.

Reasons to be cheerful

While the short-term outlook for British businesses is far from bright, many have already shown the resilience and readiness to survive challenging times, not least during the pandemic.

Often, preparation is the key to survival. Having the right legal support to call upon, when times get tough, could make all the difference for many businesses this winter.

Arag supported many thousands of our commercial policyholders through the unprecedented challenges they faced in 2020 and will help them reach 2024 intact.