Legal issues ‘needlessly risk cash reserves’

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Small businesses are unnecessarily putting their cash reserves at risk by failing to prioritise legal issues, according one survey.

A quarter of SMEs admit to having spent between £5-15,000 on dealing with legal matters within the past 12 months. Nearly one in 20 has spent over an eye-watering £30,000 in the same timeframe.

This is despite more than four in ten SMEs holding less than £10,000 in cash reserves, and 17 per cent having less than £1,000 in the bank.

Legal matters are common, according to the Direct Line survey. Over a third have had to address a problem within the past 12 months, while nearly a quarter say they have needed to do so more than once. The most common issues involved:

  • Commercial contracts (34 per cent)
  • Landlord and tenant (23 per cent)
  • Employee-related legal questions – e.g. furlough, redundancy (21 per cent)
  • Late payment and debt (21 per cent)
  • Redundancy policies – non-Covid-19-related (16 per cent)

Despite paying out huge sums, nearly seven in ten don’t see third-party legal advice as a priority for their business. This has led to over-optimism about the potential for significant risk, with four in ten (41 per cent) saying they haven’t taken any precautions whatsoever to reduce their level of legal exposure.

More than one in five would use Google to search for advice, while around one in ten would ask a friend or relative

Over a third of these say that this is because they’ll deal with a problem when it arises, while nearly three in ten say that they have other more important matters to attend to.

Despite just a quarter of SMEs saying they feel fully aware of the potential legal issues that could affect their business, 28 per cent would rely on their own knowledge to tackle a legal problem.

More than one in five would use Google to search for advice, while around one in ten would ask a friend or relative – regardless of whether they were experienced or not.

SME Autumn 2020
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Negative perceptions or attitudes to third-party legal advisors could be contributing to the problem. Nearly a quarter are reluctant to engage with lawyers, with nearly two thirds saying this is because they are too expensive.

There is also a low awareness of other sources of legal expertise. Less than a third of small businesses say they’re aware it’s possible to get legal advice on minimising risks from an insurer. More than four in ten say they’re not aware that they can get this from a third-party business provider at all.

Jemma Holloway, Head of SME Insurance at Direct Line – Business said: “Small businesses face unprecedented uncertainty and a challenging economic climate. It’s worrying that many aren’t prioritising or are casual about legal risks and are putting themselves in financial jeopardy at the worst possible time.

“Prevention is better than cure, but what many SMEs don’t realise is that it is possible to get advice on legal issues – whether big or small – from other business providers, such as insurers. This can help them improve their knowledge of the most common legal issues and reduce their exposure to risk.

“Our Legal Essentials service gives SMEs round-the-clock advice and a free legal document and business guide service. Appropriate for any SME – regardless of sector or size – it offers peace of mind and the knowledge that help is there if they need it.”

More on Direct Line’s Legal Essentials service