According to insolvency experts Begbies Traynor, firms in “critical financial distress” jumped 25 per cent in the last three months. They are businesses with county court judgments exceeding £5,000 against them, often a precursor to going under. There are nearly 38,000 companies in critical financial distress, according to data collected by analysts Red Flag for Begbies Traynor.
Julie Palmer, from Begbies Traynor, said this was caused by a combination of higher inflation and borrowing costs along with weaker consumer confidence and demand. “Tens of thousands of British companies are now in financial dire straits now that the era of cheap money is firmly behind us,” she said.
“Businesses that had loaded up on debt at rock-bottom rates, and were only able to cling on during the pandemic thanks to government support, must now deal with a financial reality check as higher interest rates hit working capital for the foreseeable future. Taken together with stubbornly high inflation and weak consumer confidence, many of these businesses will inevitably head towards failure.”
The construction sector saw the sharpest increase in companies facing critical distress with an increase of 46 per cent compared with three months ago.
Support measures during Covid – including furlough, bounce back loans and forbearance on the part of HMRC – kept company failure rates low but those supports have fallen away at the same time as inflation and interest rates have risen.
Palmer said she was receiving an increasing number of calls from other company directors asking for advice. “We call it director fatigue,” she said. “There are no solutions out there at the moment, and at the same time it’s a pretty buoyant employment market so a lot of business owners are saying ‘I just can’t do this anymore, and I might as well just work for somebody else’, and that’s the choice they’re taking.”
Jonathan Andrew, Global CEO of Bibby Financial Services, said: “Today’s insolvency figures clearly indicate that the combination of high interest rates, inflation and market uncertainty is undoubtedly beginning to bite. The cost-of-doing-business crisis is a very real threat to the UK’s economic recovery and, in particular, the UK’s SME community. The construction, hospitality and retail sectors have been the first to feel the pinch, but the full picture of SMEs’ viability will become clearer after Christmas. By then, we could be staring down the barrel of a gun for insolvencies. Without further support from both the private and public sectors, it’s possible we could see insolvencies exceed the last financial crisis.”