Red Flag Alert Report - Q4 - Toxic Combination of Risks Afflict UK Businesses as Concern Over a Surge in Insolvencies Grows

Business Health Statistics

| January 24th 2023

More News by Ric Traynor

Date Published: 24th January 2023

Red Flag Alert Report - Q4 - Toxic Combination of Risks Afflict UK Businesses as Concern Over a Surge in Insolvencies Grows
  • 610,405 businesses across the UK in ‘significant’ financial distress, 4% higher than a year ago
  • 11% rise in critical and 24% surge in significant distress levels compared to Q4 2019, show the legacy impact of Covid debt and rising inflation
  • 23,885 Country Court Judgements (CCJs) served in final three months of 2022; 52% up on 2021’s level and 77% higher than pre-Covid
  • Small companies especially vulnerable as repayments on COVID loans bite, combined with cuts to energy bill relief and high inflation, exacerbated by falling demand.

Businesses are struggling at an increasing rate as a combination of legacy COVID debt, inflation and greater pressure on consumers who are reining in spending, increasing the levels of significant financial distress across UK companies according to the latest Begbies Traynor Red Flag Alert report.

The report, which has been taking the pulse of British businesses for more than 15 years, reveals the intense strain an increasing number of companies are under as they are hit by rising labour and materials costs, higher energy bills and an economy likely heading into recession.

Julie Palmer, partner at Begbies Traynor, said: “What we are hearing from directors of businesses is extremely distressing.

“We came into 2022 hopeful that the pandemic was fully behind us and better times were ahead, only for Russia’s invasion of Ukraine to unsettle the global economy, leading to spiralling inflation and soaring energy bills and laying the foundations for what looks like a global recession. In the UK, in particular, strikes are just piling on the pressure as staff struggle to get to work and customers stay away.

“We’re taking calls from company bosses who are having trouble digging deep enough to keep battling on. They are already having to pay back the support they took to get through Covid and, anecdotally, we are hearing that both the Government and HMRC are becoming more determined in pursuing debts, while other creditors are increasingly turning to the law to recover their debts.

“Throw in a such a gloomy economic outlook, with inflation at 40-year highs and interest rates at levels not seen for 14 years, and you can see why more and more companies are starting to feel the burden of their debts, making directors question whether they can go on.”

Data from this latest Red Flag Alert research revealed a 36% increase in number of companies rated as being in “critical financial distress” in the final quarter of 2022, compared to the same period a year ago, and 10% higher than in the preceding three-month period. This is the sixth consecutive quarter that businesses in critical distress levels have risen.

Red Flag Alert also found that there are 610,405 businesses across the UK rated as being in “significant financial distress”, a rise of 4% on Q4 2021.

County Court Judgements (CCJs), widely seen as a leading indicator of financial distress, are also climbing rapidly. There were 23,885 CCJs in the final quarter of 2022, a 52% rise in the level compared to the same period a year ago. Winding Up Petitions, a much more serious legal action lodged by creditors, totalled 576 in the same period, a rise of 131% compared with 2021.

A clear measure of the distress businesses face today comes from comparing the latest CCJ data against pre-pandemic levels – which strips out the impact of Government relief packages and the moratorium on legal action to recover COVID debts. In the final quarter of 2019, the number of CCJs registered was 13,484, meaning the latest number is 77% higher.

Ms Palmer added: “Considering what directors of businesses are facing, I’m very surprised that we are not seeing more of them finally giving up and shutting down. That so many are holding on in the face of such strain is a testament to their abilities to manage their way through incredibly tough times and a seemingly endless run of fresh hurdles.

“Many of the companies captured by Red Flag Alert are SMEs, without the financial firepower larger enterprises have to fall back on. We should be applauding the directors of these smaller companies which make up the backbone of the UK’s economy for the incredible tenacity they have shown for so long.”

Red Flag Alert’s findings come at a time when the Government is preparing to scale back help for companies struggling to pay rising energy bills. When the new lower relief rates start in April, one lobby group calculates that the average small business will get £47 a year in government support, meaning that some SMEs could be subject to energy tariffs at least three times higher than even last year.

Critical distress levels among hospitality businesses surged 157% against last year’s data. A high proportion of the fixed costs of these businesses is energy related and there is concern that, post April 2023, there could be a spike in insolvency rates in this sector due to the modest level of Government assistance. Additionally, many of these businesses will face further distress as repayments on COVID-related debts become due. These factors combined with falling consumer demand could wreak havoc on an already vulnerable sector.

Ric Traynor, Executive Chairman of Begbies Traynor, commented: “Although we are – hopefully – about to pass the peak of inflation and the UK looks to have avoided recession at the end of last year, the strain is very clearly showing on businesses, as insolvency rates accelerate.

“Interest rate hikes look set to continue into Q2 2023 placing further strain on the finances of both businesses and consumers. This, combined with a far less generous business energy support scheme and legacy COVID debts, do not bode well for many SMEs, and I fear that failure rates will continue to rise well into 2024.”

Top 10 Sector Ranking – Significant Financial Distress (Number of Companies in Significant Financial Distress)

1.       Support Services (94,868)

2.       Real Estate & Property (86,892)

3.       Construction (77,077)

4.       Professional Services (42,033)

5.       Telecoms (41,207)

6.       General Retailers (38,068)

7.       Health & Education (31,651)

8.       Media (25,565)

9.       Manufacturing (21,943)

10.   Bars & Restaurants (18,905)


About the author

Ric Traynor

Executive Chairman

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Ric qualified with Arthur Andersen in 1984 and founded Begbies Traynor in 1989. Ric specialises in practice management and has considerable experience in financial turnaround and dispute resolution within professional practices.

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