UK SMEs are battling a sharp rise in bad debts at a time when wider business confidence remains fragile. Cost pressures, particularly labour, weigh heavily on the outlook and two new surveys point to an increasingly cautious environment with cashflow risk spreading across supply chains.
Bibby Financial Services (BFS), an SME funder, illustrates the scale of the challenge in its 2026 SME Confidence Tracker. The average smaller firm is now owed £66,770 in unpaid invoices, marking a 10% increase year-on-year. At the same time, 30% of firms have written off almost £30,000 as a result of customer insolvency or default. Bad debt is no longer a marginal issue but a core financial risk for these businesses.
The sentiment is echoed by new data from the British Chambers of Commerce (BCC). While a slim majority of firms still expect turnover to increase, confidence in profits is significantly weaker, reflecting the reality that rising costs are eroding margins even when revenues hold up. Staff costs are cited as rising well ahead of other inputs.
Businesses simply have less capacity to absorb financial shocks such as late or unpaid invoices. Some 62% of SMEs say customers are taking longer to pay compared with a year ago, while nearly one in five (19%) say they have delayed paying their own suppliers to manage cashflow.
In response, more SMEs are opting for Bad Debt Protection with new funding arrangements. Some are moving beyond insuring individual high-risk customers and are instead covering their entire sales ledger. Payment risk appears to be no longer concentrated among a few struggling clients but is becoming more widespread across the economy.
Aside from labour, the BCC cites taxation and inflation as ongoing pressures that are muting investment intentions. This lack of confidence can exacerbate existing productivity challenges, leaving firms less resilient to shocks such as customer default.
When companies are forced to write off unpaid invoices, they often respond by increasing prices or tightening credit terms, both of which can dampen economic activity. This dynamic aligns with the BCC’s warning that persistent cost pressures and weak confidence are limiting growth prospects for UK businesses.
Bad Debt Protection might offer some mitigation, but it’s ultimately a response to, rather than a solution for, the underlying issue of a cautious and defensive business mindset made worse by a cycle of mistrust. Restoring stronger confidence through stabilising costs, improving payment practices, and supporting investment will be essential if SMEs are to move beyond risk management and return to growth.
The 2024 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 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, we can forget about SMEs’ investment.
As recent international crises fully impact the global economy, new liquidity problems in large 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 miserable routine 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.
However hard things may become, otherwise stable suppliers to troubled companies must have the confidence to chase payment and enforce 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.
This article is written by Jo Milner, Managing Director at Buchler Phillips, an independent boutique firm, with an impeccable Mayfair London heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.