Insolvency risk increases for Scottish firms

The number of Scottish companies at higher than average risk of insolvency has risen by 36% over the course of 2017, according to insolvency and restructuring trade body R3. 

This December, nearly 27% of Scottish firms have fallen into the category of companies at greater than usual risk of insolvency – representing an increase of 36% from January 2017, when the equivalent figure was 19.6%.

Despite this, R3 says Scotland’s business community can take some reassurance from its relatively strong position compared to other parts of the UK. It claims Scotland has the lowest proportion of firms at above-average risk of anywhere in the UK. In all, nearly a third (32.9%) of UK businesses were at greater than average risk of insolvency in December, up from nearly a quarter (24.7%) in January.

Although some sectors performed better than others, R3 says each of the sectors it monitors saw their proportion of firms at above-average risk of insolvency rise between the start and the end of 2017.

R3 reveals that the restaurant sector saw the smallest rise in elevated risk levels from January (22.5%) to December (24.3%) – representing an increase of 8% -while the figures for the hotel industry rose by 36% over the same period, from 20% to 27.2%.

The Scottish technology and IT sector is finishing the year with the highest percentage (40%) of firms at greater than normal risk of becoming insolvent –increasing from 34.1% in January. R3 says this December figure is marginally higher than the overall proportion of all tech and IT firms in the UK in the elevated risk category (39.8%).

Tim Cooper, Chair of R3 in Scotland and a partner at law firm Addleshaw Goddard in Edinburgh, said: “It’s not been the easiest of years for the Scottish economy, which is reflected in the overall increases in proportions of companies at higher than usual risk of insolvency. However, R3 has recorded rises in every sector it monitors in every part of the UK, so Scotland is not an isolated case in having seen its risk profile trend upward.

“A few factors likely to have played a part in the rise in risk levels include a hike in the National Living Wage, higher inflation, exchange rate fluctuations, and costs associated with owning or leasing commercial property. There is also some uncertainty around what the final Brexit deal will look like, which could cause headaches for Scottish businesses trying to plan ahead. Businesses need to know what the framework for EU imports and exports will look like in the next few years. A lot of Scottish firms rely on EU staff, too.

“It remains to be seen whether the changes recorded by R3 over 2017 will continue into 2018. Business advisors are anecdotally reporting more demand for their services from companies which are experiencing some degree of distress. Seeking advice from a qualified and accredited professional can be a wise move for any firm struggling to adapt to new market realities, and the sooner this advice is sought, the more options a firm will have to find workable solutions to the issues it faces.

“To start 2018 with confidence, we would recommend that all firms – whatever sector they are in – remain vigilant, keep on top of cashflow, and ensure they are keeping up with developments in technology and customer demand.”

The figures are from R3’s latest insolvency risk tracker. The tracker is compiled using Bureau van Dijk’s ‘Fame’ database and measures companies’ balances sheets, director track records and other information to work out their likelihood of survival over the next 12 months.  

Begbies Traynor provide a dedicated personal insolvency help service for Scotland-based individuals struggling with debts - see www.ScotlandDebt.co.uk