Are UK SMEs burdened with bad debt or blessed with good debt?
By Mr Bankruptcy
18th November 2025
Debt has a natural and necessary part to play in the development of any business, from starting up to finding new markets to becoming an established leader.
However, debt can be either good or bad, so it’s important to know in the current challenging economic climate which kind your business is carrying.
Good versus bad debt
Good debt tends to be planned, with repayment carefully managed. It’s often the result of a loan taken out to invest in growth, providing a return on the principal amount, from an increase in productivity or a new market, for example. A good business loan can be taken out at a favourable rate through a reliable lender.
Bad debt, on the other hand, is more likely to be a survival measure – the result of insufficient planning or an unforeseen circumstance, whether that’s a crisis in your firm or an unpredicted downturn in the economy.
A bad debt often comes from a short-term, high-interest loan that enables a company to survive, making up for an immediate cashflow shortfall rather than investing in the future.
Business debt in the UK
A business survey on debt in over 52,000 UK companies earlier this year showed alarmingly large levels of debt, with the average standing at more than £365,000. This goes to show the pressure that many businesses are under just to keep going.
Neither is the debt evenly spread, in terms of sector or geography; maybe unsurprisingly, the wholesale and retail food sectors came out top for debt, at £2.7 billion, closely followed by manufacturing at £2.6 billion. Construction came in at £1.6 billion. These are all capital-intensive intensive industries compared with business services at just £1.4 million.
London led the areas surveyed with a total of £4.94 billion, leaving a large gap before Manchester came in at £370 million.
The survey did suggest that a portion of this debt could be seen as a vote of confidence in the UK economy, but unfortunately, more recent growth figures haven’t borne this out.
Higher operational costs have been blamed for the increase in short-term debt, as inflation pushes up wage demands and increase energy bills. A debt burden hangover from Covid lockdown-era ‘Bounce Back’ loans may also be playing a part.
And uncertainty also plays it part in slowing growth; a later-than-usual budget statement has made space for speculation across the media about who’s going to pick up the tab for all the financial black holes being discovered in the national finances.
Global uncertainties, such as war and the introduction of new tariffs, have also added to a nervous business environment, worrying customers and dampening demand.
The first step to dealing with debt
Uncontrolled, bad business debt can threaten a company’s long-term survival. It can lead to insolvency if the debts can’t be managed, and compulsory liquidation.
Fortunately, there’s a lot of advice available to help business owners and managers, from organisations such as Business Debtline or the Federation of Small Businesses (FSB). The National Debtline and Citizens Advice offer help for individuals.
There’s also action that business owners can take before debt becomes unmanageable. Many will already feel that they’ve cut back as much as they can, but it’s worth considering the following:
- Reviewing and prioritising debts. Prioritise urgent or high-interest debts, and don’t ignore creditors as early engagement can prevent escalation.
- Negotiating with creditors. Some lenders, including HMRC, may offer an extended payment term, or you can request a temporary payment holiday or a more realistic interest rate.
- Boosting cash flow. Offer discounts for early payments to customers and review your own outgoings.
- Increasing revenue. Diversify products or services and target new customer groups or markets. Now may not be the time to cut back on your marketing; try lower cost alternatives such as social media.
- Seeking professional help. You can speak to a debt advisor or accountant who can ensure that you understand your legal obligations, especially around director responsibilities, and suggest the most appropriate way out of your situation, maybe one you may not have been aware of.
Even if it seems that there’s no clear way forward, there is always support available to help you understand the options available to you and your business.
James Rosa Associates
James Rosa Associates is both a debt advisory and debt adjustor service. Our supportive, non-judgemental team of experienced experts offers a full range of advice and professional services, for business owners and directors or individuals looking for a way out of unmanageable debt. We also help people out of a civil or commercial dispute. Our services include:
We are authorised and regulated by the Financial Conduct Authority (FRN665061) to work with clients to produce bespoke debt solutions.
Do you qualify for a free consultation?
If you want to tackle an unmanageable debt, or you want to bring a dispute to a fast and cost-effective resolution, we offer a limited number of free consultations.
Contact James Rosa Associates, ring 0845 6807217 or email enquiries@jamesrosa.co.uk to find out if you qualify. The sooner you take the first step, the sooner we can help you to move forward.
Please be advised that all views expressed in these posts are those of the author and not of James Rosa Associates ltd.