Research reveals small to medium sized businesses are getting more litigious in reponse to economic downturn

The number of SMEs taking legal action to force clients to pay up has risen sharply, as the credit crunch takes its toll on UK businesses.

Research by the Credit Management Research Centre (CMRC) showed county court judgements against listed companies in England and Wales had risen by a quarter since the beginning of the year.

September saw almost 2,000 cases compared with just over 1,500 in January, and in sectors such as property and retail, research showed the number had increased fivefold.

Nick Wilson, director at the CMRC, said about one in four insolvencies were caused by payment delays, with restricted bank lending already squeezing small and medium-sized enterprises.

Reports earlier this year showed that money owed to Britain's SMEs rose by £2.6bn in 2007, to £18.6bn.

Commenting on the rise, Fiona Ghosh, partner at international law firm Eversheds, said in the hostile climate it was “more crucial than ever that SMEs examine their current contract terms and conditions and start to take a more proactive stance on new relationships”.

The key, as ever, is to manage cash flows effectively,” she said. “The contractual terms for payments in should be tight and those for payments out should be as flexible as possible.”

Other areas to look out for, Ghosh said, included “making sure that the counterparty cannot terminate or end the relationship simply for one late payment and the ability for the parties to renegotiate where currency fluctuations start to make the relationship commercially unviable”.

Richard Laudy, partner of law firm Pinsent and Masons said: “In the construction sector, cash management is patently the biggest rate of concern compared with 18 months ago.”