Waves of Small Business Insolvency expected over next few years

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As many as 15% of the UK’s SMEs are rated ‘fragile’ and risk insolvency during the next four years as Covid-19 state support schemes are withdrawn, according to research by Euler Hermes.

State support softened the blow of the Covid-19 shock in 2020, reducing the number of fragile SMEs by more than 8,000 in Germany, France and the UK, according to the company’s research. The UK’s share of fragile SMEs is higher than its nearest European competitors, with Germany and France standing at 7% and 13% respectively.

The insurer’s research highlights the impact and success of the government’s various state support schemes and funding during the pandemic. In 2019 the share of SMEs at risk was 17% and Euler Hermes estimates the figure would stand at 26% today if government support hadn’t been implemented.

Euler Hermes’s forecasts are based on three indicators that can help detect small business insolvency and corporate distress four years before a bankruptcy. These are profitability, capitalization and interest coverage. It applied the criteria to 525,000 SMEs across Europe to develop its forecasts.

Automotive manufacturers and suppliers rank among are among the most exposed, with around 36% within the sector exposed to the risk of insolvency. Euler Hermes also found that a quarter (25%) of those in the energy sector and almost one in five (19%) of construction firms will be vulnerable in the coming years.

Ana Boata, Head of Macroeconomic and Sector Research, Euler Hermes, said “The story that emerges from our analysis is two-fold: While on the one hand government support has provided an incredibly effective safety net for swathes of the economy, the threat of insolvency remains all-too-real for many SMEs over the coming years.’

“For now, businesses will need to deal with the economic headwinds that threaten to slow the global recovery while at the same time planning effectively for long-term growth. Supply chain disruption leaves many open to supply shortages and inflation which will limit growth, but we also expect SME payment terms and the length of time it takes to get paid for orders to rise as public support comes to an end.’

“But there is some good news: while SMEs are more indebted after the Covid-19 crisis, public support helped improve their interest coverage ratios. Low interest rates on new loans also played a significant role, as did resilient profitability and significant efforts to keep cost pressures in check.”

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