Those hardest hit have been bars and restaurants, general retailers and the construction sector that have reported year-on-year rises of 70 per cent, 48 per cent and 36 per cent respectively.
The report revealed that more than 582,000 companies are in significant financial distress with a considerable increase in the use of county court judgements to collect corporate debt.
The Begbies Traynor Red Flag Alert report has provided a snapshot of British corporate health for the past 15 years.
The research revealed the number of companies rated as being in “critical financial distress” continued to rise, jumping by more than a third in Q2 2022 compared with the same period last year to 1,957, and edging up 3 per cent compared to Q1 2022.
Businesses continue to be impacted by rising inflation in the “real economy” which is far exceeding the official rate of more than 9 per cent. Taken together with higher labour, material and energy prices, and combined with faltering consumer and business confidence, companies are facing an exceptionally difficult economic backdrop.
Adding further pressure to many companies is the repayment of the government-backed COVID support loans granted to help them survive the pandemic.
Evidence of this financial distress comes in the form of county court judgement (CCJ) data, an early warning sign of future insolvency, which revealed 46,235 rulings in the first six months of 2022, up 5 per cent on 2022 the first quarter, as creditors tried to recover debts. This compares with 59,042 CCJs during the entirety of 2021, with this year’s figure to date driven higher as the backlog in the courts clears and debts are pursued.
The sectors with the highest number of critically distressed businesses are construction, support services, real estate, general retailers, automotive, manufacturing, bars and restaurants, financial services, food and drug retailers, and industrial transportation.
Julie Palmer, partner at Begbies Traynor, said the data on companies in a “critical” financial distress painted a worrying picture.
“Having emerged from the pandemic, many companies were hoping for an economic boom but that has simply fizzled out, as supply chain issues and the invasion of Ukraine have taken their toll by driving up raw material and energy costs and reducing both business and consumer confidence,” she said.
“We are now in a very high inflationary environment that’s piling pressure on businesses that were already weakened by the shock of the pandemic.
“Sectors most exposed to discretionary consumer spending – bars and restaurants and general retailers – are feeling the pain most. Hit by staff shortages due to the latest spike in Covid rates, their customers are now reining in spending on anything that’s not necessary, ahead of the expected hike in the energy price cap, and we are seeing clear signs of this in this Red Flag data.
“I am also particularly concerned for those SMEs who operate in energy-intensive sectors, such as manufacturing, as some could simply become unviable. Without the benefit of an energy price cap, business energy tariffs have at least trebled, and for many it will be much worse.”
Ms Palmer added that support from government to prop up businesses through the pandemic could also be artificially lowering the number of businesses in critical distress.
She pointed to reports that the number of small businesses that had failed to meet repayment terms for the Bounce Back Loan Scheme (BBLS) was close to 200,000, almost double the most recent official data.
Ric Traynor, executive chairman of Begbies Traynor, said the combination of macro-economic risks is now taking its toll on UK businesses, as evidenced by this latest Red Flag Alert data.
“With inflation nearing 10 per cent, and showing little sign of abating, there can be no doubt that things are going to get worse for UK businesses before they get better. This, combined with a deteriorating geo-political landscape, is likely to have serious consequences for the UK economy,” he said.
“Rising insolvency rates, combined with our own evidence from speaking to the directors of distressed companies, highlight the impact of rising costs on businesses. The very same directors, who benefited from Government-backed Covid support loans to get them through the pandemic, are now telling us that they are simply unable to repay these debts, plus they are having to deal with rising wage demands and higher input costs.
“Additionally, the anticipated double-digit rise in business rates next April will heap more pressure on to vulnerable businesses, despite some benefiting from the recent revaluation.
“With this latest research showing almost 600,000 companies in significant financial distress, we would expect the weakest to enter insolvency over the next two years.”
