Headline insolvency figures might suggest otherwise, but beneath the surface many UK SMEs are facing intensifying liquidity pressure.
According to the latest annual figures there were 23,938 registered company insolvencies in England and Wales during 2025 — broadly in line with the previous year. Creditors’ Voluntary Liquidations (CVLs) continue to account for the majority of cases, as directors decide to close businesses while the decision is still theirs.
This is a dramatic surge; some might even say the trend is stabilising. Yet numbers alone rarely tell the full story. What they often conceal is a prolonged period of working capital erosion — a “silent squeeze” that weakens businesses long before formal procedures are triggered.
Many SMEs remain heavily reliant on external funding to manage everyday operating costs. Elevated borrowing charges over the past two years, combined with tighter lending criteria from mainstream banks, have reduced flexibility. While inflation has moderated, input costs — particularly labour, utilities and insurance — remain structurally higher than pre-pandemic levels.
Growth ambitions are also being constrained. Surveys of small business leaders consistently show that more than half need additional finance to pursue expansion, yet confidence in securing funding remains subdued. For some, the priority has shifted from growth to survival — preserving liquidity rather than investing for scale.
Late payments remain one of the most persistent and damaging pressures on SME working capital. Recent research from insurer Hiscox found that UK small businesses are currently owed an estimated £70.4 billion in late payments, with the average firm waiting on approximately £12,000 in overdue invoices each year. Almost a quarter of payments arrive late, and businesses spend the equivalent of 331 days per year waiting for payment across outstanding invoices.
The 2025 UK Payment Survey by Coface reinforces the scale of the issue: 90% of UK companies experienced at least one late payment in the past year, and 44% report delays are becoming more frequent. For smaller firms operating on narrow margins, even modest payment slippage can disrupt payroll cycles and supplier commitments.
Alongside trade debt challenges, tax liabilities are placing additional strain on cash reserves. Research published in 2025 suggests nearly 500,000 UK SMEs have missed tax payment deadlines over the past three years, with almost one in five missing multiple deadlines in the past 12 months alone. VAT and Corporation Tax are frequently cited as the most difficult obligations to manage during periods of uneven cash inflow.
While HMRC continues to offer Time to Pay arrangements, reliance on formal payment plans appears to be rising. Increased engagement from HMRC — including greater use of enforcement powers compared with the immediate post-pandemic period — signals a firmer stance on arrears recovery.
A subtle but important development is the shift in creditor behaviour. Compulsory liquidations — typically creditor-driven — are up, compared with the unusually low levels seen during the pandemic support years. Patience across supply chains appears to be running out, particularly where businesses are seen to be persistently slow in meeting obligations.
For directors, this creates a narrower window for informal resolution. A short-term cashflow gap can quickly escalate if creditors lose confidence.
Working capital distress rarely appears overnight. Rising debtor days, stretching supplier terms, repeated use of Time to Pay arrangements, or increasing reliance on short-term credit are all early indicators that liquidity is tightening.
At this stage, options remain broader: restructuring debt, renegotiating supplier agreements, reviewing cost bases, or seeking fresh equity or refinancing. Left unaddressed, however, the same pressures can tip an otherwise viable business into formal insolvency.
The current landscape does not yet point to a dramatic new spike in failures. But the underlying indicators — late payments, tax arrears and tightening creditor tolerance — suggest that many SMEs are operating with increasingly thin liquidity buffers.
For directors, the message is clear: balance sheet solvency alone is not enough. In 2026, resilience will be defined by cashflow discipline, proactive engagement with creditors and early professional advice — before the silent squeeze becomes irreversible.
This article is written by Alice Fanner, Manager at Buchler Phillips, an independent boutique firm, with an impeccable Mayfair London heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.