Towards the end of last year, Escalate was recognised as one of the top 10 most innovative and exciting new businesses in the UK. As part of the judging process, we had to explain who we are and what we do to a panel of business leaders.
This is far from an easy task when many observers try to pigeonhole us into a specific industry category. Thankfully, the judges weren’t constrained by these traditional ‘industry blinkers’ and recognised that we are a combination of everything an SME will inevitably need to support it: sometimes we are lawyers; sometimes accountants; sometimes litigation funders or adverse cost insurers; sometimes we are a membership organisation or a product. The work we do depends on the challenge the SME has, whether that is a commercial dispute; an issue of late payment or a bad debt to be resolved and collected. It depends on what the client needs from us.
Most importantly, though, the judges understood the positive impact that Escalate was making to SMEs. With that in mind, it’s my New Year’s mission for 2020 to help all UK SMEs better understand why they no longer need to suffer late payments, walk away from commercial disputes or write off ‘good’ debts. So, let me start putting that ambition into practice…
My New Year mission: explain the problem; highlight the solution
And we’ll begin with the obvious question – why are we doing this? We believe that in excess of £40 billion is lost by UK SMEs each year through commercial disputes and bad debt. If we look at the wider impact of late payments on UK SMEs then this figure becomes even greater, with Xero Accounting recently stating that there is £131 billion tied up in late payments. Let’s not hide from the fact – a late payment is a clear contract breach and therefore a commercial dispute that will become a bad debt if not resolved.
Our own recent SME survey, delivered via a number of leading accountants across the UK to their clients, showed the impact of late payments, disputes and bad debts on SMEs and the results were astonishing. 96% of SMEs regularly experience bad debts, with ‘non-payment’ or ‘contract dispute’ being the most common reasons. 60% said it was a serious issue for their business. And 40% said their business was actually put at risk because of this. These findings chime with the FSB’s previous announcement that 50,000 SMEs close each year as a result of late payments/bad debts.
Perhaps the most alarming statistic, though, was that only 29% of SMEs believed they were not paid because the other side ‘could not pay’. This means that 71% of these debts could, and should, have been settled. If £40 billion is indeed locked up and lost annually from disputes/bad debts, then as much as £28.4 billion of ‘good’ debt is potentially being written off needlessly and sitting in the wrong hands.
How can SMEs allow this to happen? What’s stopping them recovering the monies owed if the other side can pay? The message we hear from SMEs is clear: both the cost and the support system for recovery has been a major barrier. It’s too easy for debtors to refuse to pay and less hassle for creditors to ‘write off’ than pursue.
The harsh reality is that the cost of recovery is always the responsibility for the business that has suffered the loss. And If a business has suffered a £2,000 late payment/bad debt from a supplier, is it really going to turn to the support system to help recover the money its owed? A lawyer might charge them more than £2,000 in trying to recover this amount with no guarantees of success. Maybe they can turn instead to a debt collector who can work on a contingent basis. This might appear a more commercial solution. However, what happens when the debtor says ‘get lost, I can’t afford to pay’ even though they know they can? The debt collector either has to hand it back to the client or pass it over to a lawyer for the next stage with the same cost barriers as before.
This same problem plays out if the debt is £200,000 – only this time the upfront costs rise significantly, and the financial risk becomes too great for most under litigation. Of course, there are ways to mitigate this financial risk by getting a law firm to act contingently, a funder to pay the disbursement costs of litigation or an insurer to provide cost protection for case failure (so the client is not exposed for adverse costs). However, the individual pricing for each component means that, in most cases, the recovered amount after costs is much less than 50% owed and therefore not a commercially viable choice (even if you’re lucky enough to find all components to support).
So, billions are being written off because SMEs can’t afford to pursue their valid claims and the support system of professional advisers, funders and insurers won’t (or can’t) make it commercially viable.
This is where Escalate comes in
Escalate is a regulated law firm; however, it is far from being ‘just a law firm’. Escalate is unique – there’s no comparable business model in the marketplace. We’re a combination of lawyers, accountants, sector specialists, funders, insurers, brand managers and a membership organisation – all aligned and working together into a single SME solution to help fix a broken market.
Who do we help? We help all businesses who have cash locked up or lost in late payments, commercial disputes or bad debts. Yes, we do help resolve small bad debts from £1,000 upwards. And, yes, we do help manage all types of commercial disputes, ranging from contract to construction regardless of disputes size or type.
In creating Escalate, we took all the components of a dispute supply chain and reviewed it from the perspective of an SME. We then rebuilt it but within a packaged process, giving us the ability to generate a ‘lean litigation’ solution that was able to strip out all the unnecessary costs (perhaps better described as ‘transactional greed’?) that are generated by each supplier in the system trying to maximise its own position. The outcome was Escalate and it does three important things for an SME:
- Removes all financial risk. SMEs pay nothing unless Escalate makes a recovery. No longer do professionals ‘earn’ fees regardless of outcome – we back our judgement and our skills, and we fund everything including all disbursements and protection for adverse costs.
- A fixed fee that is the same for all cases. Importantly, it’s a fee that ensures the claimant is the main beneficiary.
- Change of process. We’re completely focused on getting your money back as quickly as possible. We know cash is king… and we also know how distracting a dispute can be for a business. We’ve created a process that halves the time of an average dispute – perhaps the only true version of ‘lean litigation’ in the UK market.
Escalate is now being used by a number of leading accountancy firms, law firms, Insolvency Practitioners, banks, and membership bodies including Price Bailey, Bishop Fleming, PKF, FRP, Barclays and the British Chambers of Commerce.
In just two years, we’ve been engaged to resolve over £100 million of late payments, commercial disputes or bad debts. It’s an impressive start – but this figure is insignificant when considering the amount of cash being lost or locked up annually. SMEs need to talk to their accountancy and financial advisers about Escalate.
The New Year’s resolution for SMEs is stop writing off ‘good’ debt; stop worrying about disputes; start focusing on cash recovery
Regardless of which business publication you read over the next few months, you’ll inevitably hear about the problems of late payments and cash flow constraints for SMEs during the notoriously testing first calendar quarter. However, in highlighting the problem, it’s important that SMEs understand that there’s a positive and commercially viable alternative to writing off ‘good’ debt.
So, here’s a New Year’s resolution for you to consider making. When you next look at your list of debtors, start thinking about the solution as well as the issue (now that there finally is one). Under Escalate, the SME is guaranteed 70% of any recovery with no upfront cost or financial exposure on failure. It doesn’t matter which business guru you rely on, they will all tell you the same: 70% of something is always better than 100% of nothing, especially when all financial risk has been removed and is taken on by leading professional service firms who believe in their abilities to resolve your problems and smooth your trading bumps in the road.
Escalate and its partner firms across the UK are committed to helping change the late payment, commercial dispute and bad debt landscape for SMEs for good. It’s time for you to get the full benefit of our commitment. It’s time for you to Escalate…
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