A rising number of company failures isn’t always a bad sign for the UK economy, says Ian Defty, insolvency practitioner at CVR Global, who explains why he is looking at a post-Brexit world with renewed optimism.
‘Limbo’ has been the buzz word for so many businesses since the UK voted to leave the EU more than three years ago, and when you couple this with the loss of some major high street retail brands, it’s easy to see how one could form a common mis-conception that the past few years have been fertile ground for insolvency practitioners.
While there will always be a steady, underlying pipeline of insolvency cases to deal with, insolvency practitioners generally aren’t at their busiest during an economic downturn – especially the past three years – because so many businesses have been opting to sit tight on making any decisions until the effects of Brexit are known.
Instead, a major piece of work for the insolvency industry, particularly CVR Global, over the past few years has actually been battling the rising tide of fraud linked to the failure of businesses. This can range from sophisticated fraud that is perpetrated via multiple jurisdictions, through to carbon credit VAT fraud where companies avoid paying the tax, through to traditional scams involving vulnerable victims.
Alongside battling fraud, I am expecting more insolvencies to come to the fore over the coming months and years.
Unfortunately, Brexit will force some businesses that are operating on thin profit margins to shut down due to the costs associated with new regulations, while for others an injection of up-front cash could help them to capitalise on some long-term opportunities.
Now we have a degree of certainty with the UK leaving the EU this year, I believe the banks will inevitably start substantial lending to businesses so they can diversify and expand, as well as start-up companies that are looking to establish a stable cash flow.
The nature of a buoyant economy is that among the various successes you will also have various failures, as people are given the financial licence to pursue ideas that don’t always work out. Lenders will be wary of this despite any lingering Brexit concerns, which is what I think will drive more lending over the coming months.
A word of caution though, as it is not uncommon for entrepreneurs to present a cutting-edge business idea to lenders, who are impressed with the potential and subsequently loan them the money, but after hitting an initial hurdle they fall into financial trouble.
Usually it is due to poor business management or a lack of market research, and this is where insolvency practitioners can add real value by looking for ways to reincarnate the business for the benefit of both creditor and debtor.
If Brexit-related certainty encourages the banks to lend then firms have a stronger chance of growing, which in turn, generates more business for credit agencies as entities will be asking for money to borrow.
As long as creditors – such as investors – do their homework before lending then I think this is the best approach to stimulating the economy in the long-term, particularly with the low interest rate that we currently have.
I believe that the UK’s business community has a strong future ahead of it, and an organic churn of success and failure over the coming years will play a major part in this recovery.