37% more businesses in financial distress – Begbies Traynor

The number of businesses in critical financial distress in quarter 2, 2022 has risen by 37 per cent when compared to the same period in 2021.

This is according to the latest Red Flag Alert report from corporate restructuring specialists, Begbies Traynor. Released annually for 15 years, this year’s report states that 1,957 companies are currently in critical financial distress, an increase of 3 per cent on quarter one of 2022.

Begbies Traynor, who have a number of offices in the South East, including in Brighton, Medway and Southampton, also report that the worst impacted sectors are bars & restaurants, general retailers and construction, with year-on-year increases of 70, 48 and 36 per cent respectively.

Julie Palmer, partner at Begbies Traynor, said: "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.

"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."

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Part of the problem comes from rising inflation. While the official rate of inflation is 9 per cent, the report states that inflation in the ‘real economy’ far exceeds that. This, combined with higher labour, material and energy prices, as well as faltering consumer and business confidence, has left many businesses on the ropes.

Further compounding the problem are repayments to the government’s Bounce Back Loan Scheme, with more than 200,000 failing to meet repayment terms.

The strongest evidence of the financial distress facing many businesses comes in the form of County Court Judgement data, often an early sign of future insolvency. 46,235 CCJs were issued in the first six months of 2022 as creditors try to recover debts. This is already close to approaching the 59,042 which were issued in the entirety of last year.

With official interest rates predicted to rise to 11 per cent in the autumn, the future is not looking hopeful.

Ms Palmer said: "There are firms that are struggling to work out what they will do. Do they try to battle on or just throw in the towel as they realise that in this new world, they just won't be able to repay the taxpayer-funded help they got?

"Many are fighting on, but the environment is only going to get worse, not better, at least until later next year or 2024. I fear that it may be a troublesome autumn as businesses which have struggled for so long are finally overwhelmed."

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