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Businesses braced for ‘insolvency storm to hit home’

A new report on the financial health of British companies has found that an increasing number are facing insolvency as Covid support packages come to an end and financial pressures build, especially inflation.

Business rescue specialist Begbies Traynor’s latest ‘Red Flag Alert’ revealed:

  • 589,168 UK businesses reported significant financial distress during the final quarter of 2021 – a 5% rise on the previous three months.
  • There was a 106% rise in County Court Judgments (CCJs) – a key early sign of future insolvencies, as creditors are now actively using courts to recover debts.
  • As Covid reliefs taper off, financially distressed companies brace for the full force of debts to hit.
  • Pressure is ratcheting up almost across the board, with only one sector of the 22 covered by the Red Flag Alert research showing an improved position.
  • The situation is even worse for companies already teetering on the brink of failure, with critical financial distress up 7% year‐on‐year in the final three months of 2021.

This research follows figures released by the Insolvency Service, that showed business insolvencies have exceeded pre-pandemic levels – reported on here.

‘Brave’ businesses facing the pressures

Julie Palmer, a partner at Begbies Traynor, said: “Businesses that have bravely battled through the pandemic could now start to fail as the pressures they face become too much.

“Support from the Government such as furlough payments, tax reliefs and a moratorium on landlords being able to evict businesses due to rent arrears cannot go on forever.

“Without these measures in place to protect them, a rising number of companies will have no other option but to relinquish their business after two years of struggling on in the economic uncertainty that has been tempered by measures to combat the impact of coronavirus.”

SMEs hit by the ‘perfect economic storm’

“The lag effect of the economic fallout from Covid, plus significantly higher inflation, has created a perfect economic storm for many companies, particularly the UK’s SME sector, which will undoubtedly drive insolvency rates even higher.”

According to Palmer, inflation is now the greatest threat to the economy with the true rate potentially running far beyond the official 5.4% rate and possibly many multiples more than the Bank of England’s target of 2%.

Today, rising wage, energy and materials costs mean the CPI figures are showing only part of the story in the UK and the subsequent impact on the public’s disposable income is expected to be far greater.

Fears over vulnerability of construction sector 

She continued: “The construction sector looks particularly vulnerable as raw material availability, combined with record inflation, has significantly reduced the margins for many SMEs.

“We are also seeing evidence of over‐trading within construction as the sector’s boom post‐lockdown has caused real cash flow issues that are now impacting on businesses.”

Although official government support measures are unwinding, Palmer says there are indications that the authorities are willing to help businesses that are trying to fight on.

She added: “Anecdotally, we are hearing stories about HMRC giving companies two or even three years to pay their tax bills.

“Extra leniency may not be an official policy, but it sends a signal that officials are trying to help businesses survive – even though it might only be delaying the inevitable.”

Top 10 distressed sectors*

Support services93,041
Real estate & property services75,052
Professional services41,129
Telecommunications & IT38,006
General retailers35,962
Health & education32,583
Other manufacturing21,369
Bars & restaurants20,846

* Number of companies exhibiting significant financial distress

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