Nearly three quarters of a million businesses are in ‘significant financial distress’, a 15% increase from 630,000 in Q4 2020, reveals the latest Begbies Traynor research for the first quarter (Q1) 2021
The latest figure of 723,000 businesses is the largest numerical quarterly leap, by 93,000 businesses, recorded in the quarterly Red Flag surveys since 2014. Since the pandemic started last year, it also found that there has been a 42% increase in ‘significantly distressed’ companies since Q1 2020.
The figures show that every one of the 22 sectors monitored exhibited an increase in significant financial distress, with 19 sectors experiencing double-digit increases in the first quarter of 2021. The financial distress in the transportation and logistics sector increased by 56%, real estate and property services by 51%, construction sector by 47%, and the other financial services sector by 50%.
Julie Palmer, partner at Begbies Traynor, said: ‘The last 12 months have undoubtedly been some of the hardest that many businesses have ever encountered. We must remember that this is no ordinary recession and while businesses have had significant assistance from central government, large parts of the economy have been put on hold with substantially reduced revenues. [no closing apostrophe at end of quote except last sentence of quote]]
‘Opening the doors of consumer-facing businesses on April 12 may well seem like a big step in the right direction for many of these companies as they try to shake off the traumatic trading of the last 12 months. However, our experience shows that unmanageable levels of debts and subsequent overtrading are likely to be the hidden icebergs waiting to sink even the highest profile businesses.’
The UK insolvency rate is estimated to rise more than 50% in 2021, as many of the government’s temporary measures to protect business start to unwind. The number of insolvencies is expected to rise sharply due to the backlog of ‘normal run-rate’ insolvencies, Begbies Traynor warned.
The report indicates that this figure would potentially be even higher and reach above the 60% increase experienced at the height of the global financial crisis in 2009.
Ric Traynor, executive chairman of Begbies Traynor Group plc, said: ‘Despite the unprecedented central government support offered to UK businesses it is now clear that many companies are struggling under the weight of increased debt combined with poor revenue streams.
‘The termination of this support will leave many businesses exposed to the true scale of their debt, and in many cases this will be simply unsustainable, with research indicating that some companies will be unable to even meet their interest repayments. This rise of insolvencies will not just be the well documented ‘Zombie’ businesses but credible businesses who have suffered disproportionately because of the pandemic.
‘The re-opening of the economy also presents hidden risks for many companies. Overtrading will be a real risk for many, and companies should monitor their cashflow very carefully – especially as credit lines have been stretched to breaking in many cases.’
With the landscape across all sectors of UK business changing because of the pandemic, the automotive, retail and food service sectors are expected to be the most impacted. Traynor states that businesses need to take seriously the threats they face and examine their business model to adapt to the new climate if they are going to survive.