The bad debt time bomb for SMEs

With so many SMEs suffering from bad debt, what can be done to help businesses stay afloat in 2025?

There's a ticking time bomb on the financial horizon that’s disrupting the status-quo for SMEs. It's called bad debt, and there are more than a few things businesses need to know when it comes to weathering the storm. Specifically, this isn’t a problem that's limited to bankruptcies and loan defaults. The reality is a more widespread issue that's causing ripple effects throughout supply chains around the world. But before we look at the solutions on offer to aid SMEs facing the big-bad-debt-time-bomb, we first need to look at the factors contributing to its existence in the first place.

What causes bad debt for businesses?

Bad debt occurs when businesses write-off sums of money if customers cannot or will not settle invoices in full. This may be due to payment disputes, protracted default or, in some cases, the insolvency of another business.

According to the Atradius Payment Practices Barometer survey (Jun 22 edition), amid increased awareness of payment default risk, businesses have seen an “alarming” 50% increase from 2021 in bad debts that could not be collected.

The increase in difficulty of debt collection could lead to liquidity strains and consequently, if not handled well, may result in insolvencies. Statistics from the Ministry of Law, Insolvency Office, Singapore revealed that the total numbers of Applications Filed for Liquidation and Companies Wound-Up in 2022 were 257 and 215, respectively.

The contributing factors leading to a greater number of insolvencies and, thus, bad debt, could be due to:

1. Cost of doing business crisis – With soaring energy prices, reduced incomes and subdued demand, SMEs are increasingly facing an uphill battle to boost profits and retain cashflow. In a recent study by UOB, Accenture and Dun & Bradstreet, close to 6 in 10 SMEs in Singapore have enough cash to last them less than 6 months. The situation is especially concerning for businesses which are cash and labour-intensive such as Retail and Food & Beverage sectors.

2. Impact of inflation – Businesses are under pressure as costs continue to rise. In addition they are waiting longer for stock and materials as temperamental supply chains have disrupted operations.

3. Interest rates – In a bid to combat inflation, central banks have raised interest rates in many countries. As a result, businesses are less able to borrow or access lines of credit, making debt costlier and future borrowing much harder. This, coupled with having to pay back Government loans, is having a crippling effect.

What can SMEs do to combat the threat?

When it comes to customer payments, there are some simple things you can do to give your business the best chance of reducing late payments.

Our first port of call is to encourage customers to pay promptly by agreeing payment terms up-front – and making your payment terms explicit from the outset to avoid disputes.

Offering payment options and keeping up-to-date records that can identify issues promptly can also go a long way in protecting you against any confusion, and provides a clear path to resolve any potential issues. To limit the impact of late payment, you should always get to know your customers first, and run thorough credit checks before offering credit terms and appropriate credit limits.

To make sure late payments do not turn into bad debt, you should always try to take a consistent approach. Resend your agreed credit terms and keep lines of communication open and clear about what is expected and when.

For more information on effective payment practices, you can visit our reducing late payments page for more information.

Planning ahead

Getting a loan or a grant is simply not enough when trying to combat the threat of bad debt. With SMEs being owed in unpaid invoices and stating they do not have the cashflow needed to grow – it’s no surprise that many currently are not willing to invest in their business over the coming months.

To move forward, there are several avenues available to SMEs that go beyond traditional methods of borrowing and provide more flexibility than overdrafts and loans.

• Credit control – effective credit control processes ensure your company’s payment terms and policies are respected. Making terms clear to both your customers and your credit control team helps reduce the risk of unpaid invoices and any potential payment issues.
• Funding sources – accessing available finance that goes beyond traditional options can provide SMEs with valuable growth opportunities. Private investors, crowdfunding sources and venture capital routes can give greater flexibility where many loans and overdrafts can’t.
• Bad debt protection – Protecting your business against payments delays or unpaid invoices can be crucial in preserving cashflow. By purchasing protection insurance from bad debt, you can help insulate your businesses should the worst happen.