The collapse of the countries second largest construction company, Carillion, has caused panic amongst many SMEs in the UK who were exposed to this toxic company.

The knock-on impact will likely take several months (or years) to fully be realised, as many smaller businesses take on additional debt to survive or tighten their expenses to respond to bad debts or a reduction in cashflow.

Amongst the chaos, there are lessons to be learnt for SMEs businesses in this collapse. Lessons which may have saved many small businesses facing ruin in 2018.

1.Spread your debtor book:

I would hazard a guess that of the businesses who deal with Plcs in the country, at least half would go under if the Plc went under first. Its only natural to chase larger customers and continue to increase your exposure when you finally ‘catch the big fish’.

However, this can lead to disaster! Larger firms generally have longer payment terms, are less forgiving with regard to quality of work, and are more likely to take advantage of their position in the pecking order.

Why not enjoy the benefits of larger clients with a balance of smaller, more regular income from smaller jobs? At least this way your business is more likely to survive the impact of a Woolworths/BHS/Carillion failing!

But what happens when they fail? You can protect yourself from this with……….

2. Consider debtor insurance:

Nobody likes paying insurance premiums, but I am sure many businesses wish they had cover like this today.

A debtor insurance policy usually covers the whole of the debtor book (some ‘spot’ deals are available) and insures the book up to a certain percentage in the event of debtor failure.

For example, if your debtor book was totalling £200k and Carillion made up £150k of that (75%). In the event of Carillion’s failure, an agreed percentage (say 70%) of the outstanding debt would be claimed for under the insurance policy. So, in this example the small business would receive £112.5k back from the insurance company against the debt to Carillion of £150k. Not ideal but a £37.5k loss is a lot better than £150k!

Indeed, this insurance would be likely to save a small business in the above circumstance.

3. Check your clients out – no matter the size:

This one seems obvious but in the pursuit of larger clients, is easily overlooked.

Some facts:

  • On 10 July 2017, Carillion issued a trading update that referred to a £845 million impairment charge in its construction services division
  • As a result, the contractor was demoted from the FTSE 250
  • Two days later, it was revealed that Carillion’s losses for the six months ended 30 June 2017 totalled £1.15 billion
  • In a further profit warning, on 17 November 2017, Carillion said it would breach banking covenants the following month, with full year debts set to reach up to £925m

If you continued to work for this business after this then it is hard to feel a huge degree of sympathy for you.

It is very easy to obtain financial information about trading businesses (especially Plcs) via several online portals for a nominal fee. You don’t even need to read the financial press!

The collapse of Carillion is potentially a devastating blow to many small businesses, employees and throws the future of several large Government construction projects into doubt.

Despite this, lessons can be learnt, and steps can be taken by small businesses to take responsibility, protect themselves and make sure that the failure of a larger customer doesn’t bring them down as well.


James Blacklaws


1 Comment

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