The worst levels of financial distress in hospitality and retail

Bars and restaurants, retailers and the construction sectors were the main sectors affected by difficult trading conditions, with year-on-year increases of 70%, 48% and 36% respectively.

Begbies Traynor’s latest Red Flag alert showed the number of companies classified as being in “critical financial distress” continued to rise, rising by more than a third in the second quarter of 2022 – up 3% from in the first quarter of 2022.

Julie Palmer, partner at Begbies Traynor, said: ‘After emerging from the pandemic, many companies hoped for an economic boom but that simply fell apart as supply chain issues and the invasion of the have wreaked havoc by increasing raw material and energy costs and reducing business and consumer confidence.

“We are now in a very high inflationary environment which is putting pressure on companies already weakened by the shock of the pandemic.

“Sectors most exposed to discretionary consumer spending – bars and restaurants and general retailers – are feeling the pain the most.”

SMEs are also affected, with more than 582,000 companies in serious financial difficulty, although this figure is unchanged from the previous quarter.

Businesses continue to be impacted by rising inflation, well above the official rate by more than 9%. With high prices for labour, materials and energy and faltering consumer and business confidence, companies are facing a difficult economic environment.

Palmer added: “I am also particularly concerned about SMEs that operate in energy-intensive sectors, such as manufacturing, as some may simply become unviable. Without the benefit of an energy price cap, business energy prices have at least tripled, and for many it will be much worse.

Evidence of this financial distress comes from County Court Judgments (CCJ) data, which revealed 46,235 rulings in the first six months of 2022, up 5% from the first quarter, as creditors tried to collect the debt – there were 59,042 CCJs during the whole period of 2021.

CCJs are leading indicators of insolvency, and as the courts return to normal, there are fears that this number will rise much further.

The sectors with the highest number of critically distressed businesses are construction, real estate, general retailers and restaurants, automotive, and industrial transportation.

Ric Traynor, executive chairman of Begbies Traynor, said: ‘The combination of macroeconomic risks is now weighing on UK businesses, as evidenced by this latest Reg Flag Alert data.

“With inflation close to 10% and showing few signs of slowing down, there is no doubt that things will get worse for UK businesses before they get better. This, combined with a deterioration in the geopolitical landscape, is likely to have serious consequences for the UK economy.

“The rise in insolvency rates, combined with our own evidence from our interviews with directors of struggling companies, highlights the impact of rising costs on businesses. The same administrators, who benefited from government-backed Covid support loans to get through the pandemic, now tell us that they are simply unable to repay those debts, plus they have to deal with growing wage demands and higher input costs. ‘

Sarah J. Greer