Companies in critical financial distress up 36%

Peninsula Team

January 26 2023

The number of companies rated as being under critical financial distress continues to rise rapidly as debt accumulates

The number of businesses rated as being in critical financial distress jumped by 36% to 2,229 in Q4 2022, compared to the same period a year ago, in the latest Begbies Traynor Red Flag report.

Firms found to be in critical distress typically hold minor county court judgments (CCJs) of more than £5,000 filed against them. Significant distress is defined as those with CCJs of less than £5,000.

Records of judgments are kept for six years unless the business pay the full amount within a month.

This is the sixth consecutive quarter that the number of businesses in critical distress has risen. With the official rate of inflation at 10.5%, businesses now face the prospect of interest rate hikes, a move that could force distressed businesses to enter insolvency as debt accumulates over time.

There are 610,405 businesses across the UK in significant financial distress, according to the report, representing a 4% quarterly increase.

The support services sector saw the largest number of companies in significant financial distress, standing at 94,868. This was followed by real estate and property at 86,892 and construction at 77,077, respectively.

Julie Palmer, partner at Begbies Traynor, said: ‘What we are hearing from directors of businesses is extremely distressing.

‘We came into 2022 hopeful that the pandemic was fully behind us and better times were ahead, only for Russia’s invasion of Ukraine to unsettle the global economy, leading to spiralling inflation and soaring energy bills and laying the foundations for what looks like a global recession.

‘In the UK, in particular, strikes are just piling on the pressure as staff struggle to get to work and customers stay away.

‘Many of the companies captured by the Red Flag Alert are SMEs, without the financial firepower larger enterprises have to fall back on. We should be applauding the directors of these smaller companies which make up the backbone of the UK’s economy for the incredible tenacity they have shown for so long.’

The report revealed that businesses across the UK are feeling intense strain as they are hit by rising labour and materials costs, higher energy bills and an economy likely heading into a recession.

Critical distress levels among hospitality businesses surged 157% against last year’s data, with a high proportion of the fixed costs being energy related.

The report also raised concerns that, beyond April 2023, there may be a spike in insolvency rates in the hospitality sector due to the modest level of government energy support.

In addition, many of these businesses will face further distress as repayments on Covid-19 related debts become due.

Ric Traynor, executive chairman of Begbies Traynor, said: ‘Although we are hopefully about to pass the peak of inflation and the UK looks to have avoided recession at the end of last year, the strain is very clearly showing on businesses, as insolvency rates accelerate.

‘Interest rate hikes look set to continue into Q2 2023 placing further strain on the finances of both businesses and consumers. This, combined with a far less generous business energy support scheme and legacy Covid debts, does not bode well for many SMEs, and I fear that failure rates will continue to rise well into 2024.’

Around 23,885 CCJs were served against businesses during Q4, bringing the total for the year to 87,716.

Similarly, winding-up petitions were 131% higher than in the same period in 2021, showing that companies are undergoing aggressive legal enforcement measures to recoup debts.

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