Don't let failing firms derail your own business

The number of people out of work in the UK has risen to its highest level in 14 years. Unemployment topped 2.47 million in the three months to July.

As a result, more people are starting up in business on their own then ever before. Figures from Barclays showed that 437,000 new businesses were started in 2008, up from 432,000 the previous year.

But record insolvency figures released last month show that even if you make a success of working for yourself, you could be hit by unpaid invoices from other companies going bust.

Nearly 1 per cent of companies went into liquidation in the 12 months to June 2009. And for every company that fails, a trail of unpaid creditors is left behind. The Professional Contractors Group (PCG), which represents and supports contractors and freelancers, said conditions were tough enough without the added strain of invoices going unpaid.

For software contractor Sandeep Sirah, experience and goodwill counted for little when things went wrong. What began as a 90-day outstanding payment took more than 120 days to be recovered. The company Mr Sirah was dealing with had cash-flow problems. With the help of debt recovery firm Creditsafe, Mr Sirah was able to recover all the money owed to him. Others have not been so lucky.

One self-employed technical consultant had checked out the financial position of the company he was due to advise before he started work for them in Tanzania. However, his payments didn't arrive and he got nowhere when he pressed for payment. Finally, he flew back to the UK and refused to return until he was paid.

"I realised the organisation was sinking. My only course of action was to stop providing the service," he said. "I got some money back via a debt collection agency but nowhere near all of it."

The PCG publishes guidance for its members explaining the common warning signs of struggling businesses. They include issues such as payments being late; difficulty contacting key personnel; a request for a change in business terms; phone and/or website problems; low staff morale and high staff turnover.

Barclays Bank offers small businesses – whether or not they are customers – a free credit checking service on would-be clients. The Government's own businesslink website (businesslink.org.uk) also has tips. Companies House provides company accounts.

"You have to be careful with start-ups," said Sid Home, the managing director of Creditsafe. "Limit your exposure, shorten your payment terms and build up a picture of how the business is being run."

If the new business is a limited company, it is easy to identify who the directors are and their history of running previous businesses. If they are limited companies, find out what paid-up share capital has been put in by the directors.