Almost 40,000 UK companies in 'critical' financial distress, says Begbies Traynor report

There has been a near 25% increase in the number of businesses in 'critical' financial distress, with firms in London and the south east topping the regional rankings, according to the latest Begbies Traynor 'Red Flag Alert'.

Nearly 40,000 companies, or 37,722 across the UK, are revealed to be in a 'critical' state in the third quarter this year - up 25% since the second quarter.

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It comes as firms grapple with the new economic reality of higher interest rates, resilient inflation and weaker consumer confidence.

According to the report, London has 137,515 companies in 'significant' distress with 12,146 in a 'critical' situation. The South East has 83,598 companies, which are described as in 'significant distress', with 6,233 in a 'critical' state.

Across the UK, 478,176 businesses are now classed as in 'significant' financial distress - up 8.7% on the prior (second) quarter, at 439,815.

"Tens of thousands of British companies are now in financial dire straits now that the era of cheap money is firmly behind us," said Julie Palmer, partner at professional services consultancy Begbies Traynor.

"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 industry, which has long been a bellwether for the health of the economy, looks particularly vulnerable with over 70,000 firms now in significant financial distress and circa 6,000 in much more serious critical financial distress - often a precursor to formal insolvency," she added.

Construction and real estate companies now account for almost 30% of all companies in 'critical financial distress', while in the retail sector, food and drug retailers were up 33% and general retailers up 14% quarter-on-quarter.

Ric Traynor, executive chairman of Begbies Traynor, added: "I am hopeful that stabilising inflation and interest rates will start to slow the rising levels of distress in the economy in due course, but history dictates that this will take some time and insolvencies often peak long after a recovery has started. Unfortunately for many businesses, time is not on their side.

"The ongoing geo-political uncertainty, which is particularly affecting commodity and energy prices, coupled with high interest rates, weak consumer demand, sticky levels of inflation and an anticipated recession over the coming year, may simply prove too much for many of these distressed businesses."

Red Flag Alert has been measuring and reporting corporate financial distress since 2004 and has become a benchmark on the underlying health of companies across every sector and region of the UK.

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