Corporate financial distress levels are rising

According to a new study, there was a 19% increase in the number of companies in critical financial difficulty in the first quarter of 2022.

The latest Begbies Traynor ‘Red Flag Alert’ study, which looked at the financial health of UK businesses over the past 15 years, highlighted the pressure events of the past two years have put on thousands of UK businesses.

He found that while many businesses were helped during the pandemic and its aftershocks by state support, many are struggling now that the aid has ended and costs are skyrocketing.

The most recent County Court Judgments (CCJ) data – a harbinger of future insolvencies – revealed 11,673 decisions in March, up 179% from the monthly average of the previous two years and at most high level in a single month for five years. For the quarter, the figure was 22,552.

As businesses grapple with rising inflation coupled with government Covid support loan repayment requirements, the report found there is a growing risk of a wave of insolvency affecting vulnerable UK businesses.

The number of companies in critical financial difficulty rose to 1,891 in the first quarter of 2022, almost a fifth more than the same period last year, as companies in significant financial difficulty fell by 20% compared to the level seen a year ago at 581,596, although this is stable compared to the previous quarter.

Julie Palmer, a partner at Begbies Traynor, said voluntary creditor liquidations – the most common type of business insolvency – more than doubled in March this year compared to March 2021 and increased by 62% compared to March. compared to March 2019.

“Government finances are themselves affected by rising interest rates; they just aren’t in a position to introduce other significant funding into the system, and they now have a choice to make.

“Are they rushing to claw back funds distributed during the pandemic to ensure there was a functioning economy afterwards? Or look for ways to control the number of businesses that fail?

“Having invested so much money in protecting businesses over the past two years, ministers will not want to see it wasted as businesses crumble, unable to repay their debts.”

She said she expected to see the government introduce “low-cost forms of additional support”, likely through leniency in the reimbursement of pandemic funding.

“We could see a similar approach to war bonds, with extended tenors as ministers follow the adage that a rolling loan generates no loss.

“Take a hard line on the reimbursement of the CBILS [Coronavirus Business Interruption Loan Scheme] and further lending would likely push companies over the edge, risking wasting the billions pumped into the economy, and the legacy of that support likely explains the year-on-year decline in significant financial hardship.

In more encouraging news, separate new research from insurance premium finance company Premium Credit found that 37% of SMEs expect their revenues to increase over the next 12 months, with 15% expecting increases of 10% or more. Only 26% thought their income would drop over the next 12 months, while 18% expected it to stay the same and 21% didn’t know what would happen.

The main reason for revenue growth was the general recovery from the impact of the pandemic, cited by 58% of companies expecting growth, while 35% said it would be driven by new product launches and 34% by penetrating new markets.

The research was conducted online by Consumer Intelligence among 745 small business owners and managers in March this year.

Sarah J. Greer