Hidden debts of closed businesses costing UK economy £4.7 billion a year

Businesses choosing to close down voluntarily without going through the official insolvency process are costing the UK economy an average of £4.7 billion every year, research from Experian has found.

It revealed that millions of business closures thought to be benign in fact owe billions of pounds in hidden debt to existing firms.

Analysis of millions of supposedly solvent firms that shut down voluntarily since 2000 found that 13 per cent of these firms had debts that exceeded their total assets shortly before they closed.

Of the 300,000 businesses that wound up voluntarily in 2011, around 36,000 had combined debts amounting to £5.9 billion.

This is in addition to the £11.7 billion worth of debt left behind by businesses going through the official insolvency process in the same period.

Managing Director of Experian business information services, Max Firth, said that although the 'hidden' debt is lower than that left behind by those going through the official insolvency process, unofficial closures are adding a further 50 per cent to the debt owed by those going through the official process.

"Failing to detect signs of deterioration and not reacting before a customer or supplier gets to the insolvency or dissolution stage, can be crippling for some firms," he warned.

"Monitoring financial health of other firms is more than just good business practice at any time, but clearly more critical in today's climate where many businesses are experiencing cash flow difficulties."

Small businesses and the self-employed often wind up for reasons such as retirement or becoming employed within another company, typically with little impact on other firms and with little debt left behind.

However, Experian found that the number of businesses winding up voluntarily as a result of financial difficulties increased during the recession.

Although these businesses leave behind relatively small debts - around 35 per cent have less than £10k of total assets - the volume of businesses winding up in this way means that debts can amount to billions of pounds.