Critical corporate financial distress levels jump as cocktail of threats start to take their toll

• Concerns as the number of companies in critical financial distress increased to 1,891 in the first quarter of 2022, almost a fifth higher than the same period last year 
• The 19% year-on-year increase has been driven by a 51% jump in the construction sector and a 42% rise among bars and restaurants
• Businesses in significant financial distress down 20% on the level a year ago at 581,596, though this is flat on the previous quarter
• County Court Judgements – a warning sign of future insolvencies – up 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
• Data from Begbies Traynor’s “Red Flag Alert” points to a coming wave of business failures as the economy adjusts to the post-pandemic reality with Covid reliefs cut off and a rapid growth in inflation

The latest Begbies Traynor “Red Flag Alert” research, which has examined the financial health of British companies for the past 15 years, highlights the strain two years of extraordinary financial pressures have had on thousands of UK companies.

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.

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.”

Ms 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.

She continued: “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 chairman of Begbies Traynor, commented;

“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.”