Sharp rise of Businesses in ‘Financial distress’

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businesses in financial distress

Leading Insolvency firm Begbies Traynor has reported a 19% rise in Companies in critical financial distress for the first 3 months of 2022.

Research conducted by the Insolvency specialist has found that 1,891 firms were now in severe financial distress for the first quarter of the year. This is almost a fifth higher than for the same period of twenty twenty-one (2021)

The company says that the 19% year-on-year increase has been significantly boosted by a 51% jump in insolvencies for the construction sector and a 42% rise in the hospitality sector such restaurants.

Businesses in significant financial distress are down 20% on the level a year ago at 581,596, though this is flat on the previous quarter.

The data points to a forthcoming wave of business failures as the economy adjusts to the post-pandemic reality with Covid reliefs cut off and rapid growth in inflation.

Helped through the pandemic and its aftershocks by state support, the report now reveals a 19% jump in the number of companies in critical financial distress with these measures cut off and costs spiralling.

The most recent County Court Judgements (CCJs) data revealed 11,673 rulings in March, up 179% on the monthly average for the previous two years and the highest level in a single month for five years. County Court Judgements seen as a warning sign of future insolvencies, have risen 157% to 22,552 in the quarter compared with a year ago with March having seen the highest number in a single month for five years.

With companies struggling with rising inflation, coupled with the demands of repaying Government Covid support loans, there is now a growing risk of a wave of insolvencies affecting vulnerable British businesses.

Julie Palmer, Partner at Begbies Traynor, warned that unless there is action to allow struggling businesses to mitigate the impact of these pressures, they risk being unable to continue to operate. “The critical distress and CCJ data are likely predictors of a wave of insolvencies coming – it’s just a case of when the dam holding it back finally bursts.

The latest Government insolvency figures for March reinforce this worrying trend with creditors’ voluntary liquidations – the most common type of corporate insolvency – more than doubling compared to March 2021 and up 62% compared to March 2019

“The Government’s finances are themselves taking a hit from the increasing interest environment; they are simply not able to introduce further significant funding into the system, and they now have a choice to make. Do they rush to recover funds handed out during the pandemic to ensure there was a functioning economy afterwards? Or look for ways to control the number of businesses that fail?

“Having put so much money into protecting businesses over the past two years, ministers won’t want to see it wasted as companies collapse, unable to repay their debts.”

Palmer said one way the Government could ease the pressure on embattled businesses while not writing off debts racked up through measures such as the Coronavirus Business Interruption Loan Scheme (CBILS) would be taking a longer-term view.

“I’d expect low-cost forms of further support, probably through leniency in repaying pandemic funding.”

“We could see an approach similar to war bonds, with terms being extended as ministers follow the adage that a rolling loan gathers no loss.”

“Taking a hard line on repaying CBILS and other loans would likely drive businesses over the edge, risking the billions fed into the economy being wasted, and the legacy of this support probably explains the year-on-year fall in significant financial distress.”

Ric Traynor, Executive Chair of Begbies Traynor said “Inflation has become a global issue, not just a domestic problem. The effects of increasing costs are now starting to take their toll on businesses and consumers alike. For the first time in more than a decade, inflation is the prime concern for businesses.”

“This could mean that companies which have just been surviving, being kept alive only by government support, finally succumb to the inevitable.”

“Additionally, consumer demand is likely to slow markedly as cost pressures pile up ahead of the anticipated increase in energy costs in October, and families reduce their appetite for spending accordingly. If these pressures take their toll on both corporate and personal finances, it could be particularly difficult in the latter quarters of this year.”

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