Last year Business Debtline spoke to a record number of small business owners and directors. In all, Business Debtline advisers answered nearly 38,000 calls – a highest number in the service’s history – from 26,000 small businesses, of which 6,181 had debts of over £50,000.

Nicola Connop spokesperson for Business Debtline said: “Our team of advisers speak to thousands of struggling small businesses every month. Many of these businesses have been hit by the tough economic climate, with lots of callers pointing to trade shortfalls, late payers and supplier issues as the reason for their difficulties. It is clear to us that the difficulties faced by small businesses extend far beyond the insolvency figures announced today.

“Whilst insolvency can seem like a daunting process, there are occasions where it will be the best option, both financially as an individual, and also with a view to trading again in the future. Business Debtline can help small businesses identify when insolvency might be a sensible move. Where it isn’t the right option, we can help small businesses get back on their feet.”

Business Debtline is open 9am – 5:30pm Monday to Friday. Call 0800 197 6062 for free, independent and confidential advice.

Firms with 101 to 500 employees paid their invoices three quarters of a day faster than in the previous quarter (from 25.84 days to 25.07 days), while firms with more than 501 employees improved by two thirds of a day (from 34.77 days to 34.12 days).

These businesses also led the way in improvements when compared to their payment performance in Q4 2010. Firms with more than 501 employees settled their invoices almost two days faster while firms with 101 to 500 employees improved by almost three quarters of a day – from 36.06 days and 25.79 days in Q4 2010, respectively.

Jason Mills, head of payment performance at Experian UK & Ireland, said: “Payment performance is the timeliest indicator of the current health of any business, so the overall improvement suggests that during the last three months of 2011, pressure on cash flow and finances was more manageable for most businesses.

“Feedback from our larger customers demonstrates awareness and understanding of the struggles faced by some of their key SME suppliers so are prioritising payments to them, to better support them.

“The only firms to see an increase in their payment performance from Q3 to Q4 were firms with three to five employees. The increase, however, was very small and is a timely reminder for smaller firms to credit check potential new and current business customers for signs of possible non-payment before it is too late.”

Tim Breedon will be supported by a panel of experts drawn from the business and finance community, who will examine the challenges facing businesses in diversifying their finance. The focus will be on debt and credit products, looking at a range of finance choices, old and new, from corporate bonds to ‘crowd-funding’.

Business Secretary Vince Cable said:

“Businesses across the UK are still in many cases unhappy with the way they have been treated by banks.

“We have secured a rise in new lending from the biggest banks this year and credit easing is designed to provide another immediate boost. But I want to see as much competition in the market as possible and for businesses to have access to a wide range of finance sources.

“There are exciting innovations emerging that provide alternatives to bank lending. Businesses are selling bonds directly to their customers, missing out the middle-men. And peer-to-peer lending has opened up opportunities for savers to invest directly in the fortunes of UK businesses. I want to investigate and dismantle any barriers to these and future innovations.

“Tim Breedon is a highly capable and well-respected figure in finance and I look forward to working with him in the coming months as he takes forward this important work.”

The Taskforce was announced as part of the credit easing package in the Autumn Statement. It will report to Government ahead of the 2012 Budget statement.

UK businesses have been heavily reliant on banks to raise finance. The majority of smaller and mid-sized businesses rely solely on bank loans to raise finance. Only around 10 per cent of these businesses seek asset-based finance and fewer than 5 per cent choose bond or mezzanine finance.

The Taskforce will work with businesses, lenders, investors and providers of alternative finance to examine structural and behavioural barriers to raising non-bank finance. It will set out what steps are needed to ensure businesses can access a wider range of alternative finance sources.

With bank confidence still at an all-time low, small business owners have turned to their personal funds to boost their businesses. Over half (57 per cent) of small business owners have used their personal funds to inject capital into their business and 17 per cent have asked friends and family for additional funds. With over 70 per cent of borro’s customers being small business owners it is not surprising that 16 per cent of SME owners have also used their personal assets to secure finance over the past 12 months.

Two thirds (66 per cent) of small and medium sized business owners  lack confidence in their bank, and are unsure of whether their bank will lend to them. As a result only one in five (19 per cent) of SMEs have attempted to secure bank finance for their business in the past year and only a third (31 per cent) of this group have been successful in securing the finance in full.

Over two thirds (67 per cent) of small to medium sized business owners believe that banks should relax their lending criteria as those seeking finance are denied due to credit checks and not fitting the lenders profile.

Paul Aitken, CEO of borro, commented: “A dramatic shift is needed for smaller business owners to feel they can gain access to much needed finance. While some of the initiatives introduced by the Government may ease the capital battle that has taken place over the past year; there is still a demand for small business owners to access finance quickly. This may be to ensure the business is able to take advantage of growth opportunities or address cash flow problems before they escalate. Our research demonstrates that this demand is not being met by banks and other traditional lenders.”

The survey of small to medium-sized enterprises has revealed that 14 per cent now spend more than a week a month chasing customers for payment – up from just two per cent in March 2010.

Chasing customer late payments loses UK businesses countless working days and it is thought this could be costing the economy £4.4billion every year.

The research was carried out as the Government considers implementing a new European Directive next year which sets the standard payment term at 30 days and is designed to reduce the length of time businesses have to wait for payment. It will also allow small businesses to charge an extra eight per cent on their bill if the customer breaks the payment terms. Business minister Ed Davey said the move would address some of the concerns expressed by small business owners over payment terms and late payment.

In terms of industry sectors business services are one of the worst affected with 16 per cent spending more than a week each month chasing payments – this will be of particular concern as it is up from zero last year.  The rate among construction firms has almost doubled to 12 per cent compared to seven per cent in 2010. But there is better news for the manufacturing sector where just three per cent of firms spend over a week a month chasing customers for payment which is down from eight per cent last year.

Across the regions a real north-south divide emerges as more than a quarter, 27 per cent, of businesses in the North East, which has been hit badly in the economic downturn, spend more than a week a month chasing payments which has increased from zero.

But in the South East, traditionally one of the most prosperous areas of the country the rate is much lower at 10 per cent.

Edward Rimmer, UK chief executive for Bibby Financial Services, said: “It is a real concern to see so many more businesses having to spend longer chasing payments, which is time that could be better spent building their businesses.

“The introduction of the EU directive would be a welcome move to tackle the late payment issue and would provide more leverage to businesses owners in demanding payment for their hard work, which in turn will enable better control over their cash flow. However, in a competitive and challenging environment many business owners are reluctant to jeopardise existing relationships with customers or risk losing business by exercising their rights to charge interest on overdue payments, particularly during these tough trading times. In addition, smaller businesses just do not have the time or resources to keep chasing late payers let alone go down the legislative route to recoup payments.”

“However, there are some solutions to help deal with the late payment issue and free up cash flow. Companies must ensure they are in control of their finances and then look at all the cash flow options available. If they cannot afford to employ an internal credit control function then they could consider invoice finance, which not only frees up cash flow but takes away the burden of chasing late payment and allows owners and managers to focus on other important core aspects of managing and growing their businesses.

“The small and medium sized businesses in this country are a vital component in the engine of the economy and as such it is crucial that they are able to run as smoothly as possible otherwise the long-awaited recovery may itself be delayed.”

Experian’s survey of nearly 700 UK small businesses found that 71 per cent did not check their customers’ credit status, exposing them to a greater risk of being paid late or not being paid at all.

The survey also revealed that 39 per cent of small businesses did not know what a credit score was, while 61 per cent have never checked their own score.  Businesses that do not check their scores are unlikely to be aware of any issues until they lose out on a contract with a potential new customer, are refused materials from a new supplier or are turned down for finance.

Credit scores provide an assessment of a business’s financial health, with a low score implying that a business is more likely to fail. According to Experian, for small businesses many low scores can stem from a lack of detailed data about the business or a failure to file complete or accurate information, rather than underlying financial insecurity.

A low credit score can affect a business’s ability to access finance or attract new customers, while it could also force suppliers to impose more stringent trading agreements.  Small businesses tend to rely on a small pool of suppliers and customers, and a single customer loss or change in terms can have a large impact on the financial health of the business.

Simon Streat, managing director of Experian’s UK SME business, said: “Two thirds of small businesses may be blind to their credit scores, but their larger customers, suppliers and banks certainly won’t be.

“Failure to address credit problems may put small and medium sized businesses at a big disadvantage, as many organisations will be put off engaging with a company that has a low score. It is important for businesses to monitor their credit score on a regular basis to ensure it reflects their situation accurately and to be able to take action to resolve any issues that are highlighted.

“Simply taking the steps to check the credit score of firms before doing business with them is straightforward and affordable, and it could make all the difference.”

Factors such as incomplete accounts, a location change, the move from non-limited to limited status, or mergers and acquisitions, can all influence credit scores.  By engaging proactively with credit reference agencies, firms will be better equipped to take action to boost their score and improve the external perception of their business.

It is thought that the ICB, due to report on Monday, will propose that internal ring fences should be put in place to separate the banks’ retail and wholesale divisions and that the banks should increase the amount of capital they hold.

The banking lobby has said that doing this would have a detrimental effect on the amount of money that it can lend and that the cost of finance would increase as a result. They have also said that any reforms now would derail economic recovery.

The banks say that ringfencing will remove the implicit Government guarantee to bail-out a bank that is in trouble and that being required to hold more capital will mean that there is less money to lend.

However, in a new paper, ‘Does bank ringfencing automatically mean an increase in the cost of borrowing?’, the FSB argues that the guarantee would be removed from the investment banking arm and would remain for the retail arm – the section of the bank that lends to people and small businesses.

And, increasing the capital requirements over the medium term and putting a ringfence in place would be beneficial to the structural resilience of the UK banking sector.

If the ICB suggests that capital requirements are raised to more than 10 per cent for example, the FSB recommends reforms be announced as soon as possible but that the banks be given the course of this Parliament to reach those standards. Funding for this increase can be made up from ear-marked profits and reductions in short term incentivised pay.

John Walker, national chairman, Federation of Small Businesses, said:

“The banking sector cannot be too big to fail as the taxpayer cannot afford another bank bail-out. The Government has a golden opportunity to reform the banking sector and it must stand by the promises that it has made.

“The recommendations that the ICB make must be looked at closely and the Government must act on them as soon as possible and ensure they are completed before the end of the next General Election. The Government must use this once in a lifetime opportunity to make the banking sector safer, more competitive and less burdensome on the taxpayer.”

Experian’s snapshot analysis of the construction sector between 2007 and the present day shows that mid-sized firms, with 26-50 and 51-100 employees, lack the flexibility and low overheads of smaller players, yet struggle to compete with the financial clout and resources of their larger rivals.

The analysis has also revealed that although insolvencies within the sector have stabilised, the overall financial strength has dropped to a lower level than during the 2009 slump, led mainly by the mid-sized businesses.  The smallest and largest firms within the construction sector were the least affected, seeing lower comparative insolvency rates than the mid-sized firms.

Key highlights from the analysis include:

• The largest firms (501 employees or more) saw their financial strength score remain above 80, indicating relatively robust financial health.

• The smallest firms (up to 10 employees) saw their average score fall as low as 78.6 in May 2010, but these firms still managed to outperform or match the average score for the sector as a whole during 2007-2011.

• Mid sized firms – with 26-50 and 51-100 employees – saw their scores fall as low as 77.3 and 76.6 in January 2010, but both categories have seen a moderate improvement since, rebounding to reach 78.14 and 78.34 by June 2011.

• Companies with between 26-50 employees were the most at risk during the period, with an average insolvency rate of 1.11 per cent since 2007.

• Regionally, the North East of England proved to be the least resilient area of the UK for construction, consistently showing the highest insolvency rate since 2007 – 0.7 per cent of the total business population.

Simon Streat, managing director of Experian’s UK SME business, said: “The challenging conditions in the construction sector mean that competition is now fierce and larger firms are bidding for the smaller contracts that they would have normally passed on.

“As a result, both the smaller and mid-sized companies are having to look further and wider for new business and offer more competitive prices than their larger counterparts.  Smaller construction firms that have lower overheads and more flexibility are managing to work around this, but mid sized firms are finding their revenues increasingly squeezed while still having to maintain the same basic outgoings.

“The fact that insolvencies have stabilised is a positive sign, but with financial strength of these firms remaining at a low level, it indicates that they are not out of the water quite yet. It’s vital, therefore, that these vulnerable mid-sized businesses take action now to safeguard their operations.  This means changing the way their find new and target customers and tying new customers into robust and stringent contracts to protect against late or non-payment.

“It is also wise for these firms to pay close attention to economic data such as insolvency rates and financial strength scores. This data often points to the areas of the country where profitable contracts can still be found, as well as the areas where businesses need to exercise caution before pursuing a contract.”

The US Federal Reserve announced on August 9th that it would freeze short-term interest rates for two years as a measure to improve business and consumer confidence.

Philip White, CEO of Syscap, said: “A lot of UK SMEs would be far more willing to invest in business assets and their staff if they knew that the base rate was going to be capped for the next two years.”

“Businesses can fix their borrowing costs with their lender but obviously the lender has to charge them a premium for that.”

“If the Bank of England were to commit to keeping rates fixed for a set period it would act as a real shot in the arm for the UK economy.”

“All the periodical speculation that you get about rising interest rates can be incredibly unsettling for borrowers.”

Syscap explains that a lot of measures used by the Federal Reserve to try and foster an economic recovery in the US have subsequently been adopted by the Bank of England.

Syscap says that whilst commercial borrowing rates are not solely determined by the Bank of England base rate (more often it is linked to LIBOR) a commitment to steady base rates would be a very powerful message and should help keep rates across the market down.

Adds Philip White: “In actual fact in the current climate, leasing provides an ideal mechanism or facility to fix the cost of your investment, providing predictability and a hedge against future rate increases.”

According to figures obtained the number of Members Voluntary Liquidations (the technical term for the voluntary liquidation of companies) rose to 3,578 in 2010, up from 3,268 the previous year as businesses continue to cut costs.

According to McGrigors commercial law firm, businesses are increasingly looking to streamline their complex corporate structures. McGrigors explains that many companies will have gradually acquired complex corporate structures over time – through takeovers and organic growth – which are now inefficient.

Paul Sutton, Corporate Partner at McGrigors, says: “Closing a redundant corporate entity can save up to £20,000 in administrative costs every year.”

“Businesses are increasingly looking to review their corporate structures and actively reduce administrative costs so they are in better shape going forward.”

“Historic tax planning may have prompted some businesses to implement complicated legal structures. However, the tax benefits may no longer justify the ongoing costs of maintaining those complex structures.”

“Companies will also be keen to help directors comply with their legal obligations by merging subsidiaries and reducing the number of director roles that they have.”

“Changes in business plans during the recession may have left some subsidiaries as simple legacies. Company directors will now be keen to ensure that their businesses are as streamlined as possible as they embark on the next phase of growth.”

McGrigors adds that the overall number of company liquidations has fallen by 16% over the last year.

Paul Sutton says: “The rise in the voluntary closure of subsidiaries may not sound like a big increase – but in the context of a large drop in overall liquidations, this is an extremely significant rise.”

“The cost savings of closing subsidiaries can be immense. When you consider that companies often have hundreds of global subsidiaries, it can add up to a very significant saving.”