PSCs fuelling growth in companies in ‘significant’ financial distress

Nearly half a million businesses across the UK are in a state of 'significant' financial distress, 27% more than at the same point last year, according to research by Begbies Traynor which also suggests larger numbers of personal service companies (PSCs) are getting into difficulties

The firm’s quarterly red flag alert research shows 448,011 businesses experiencing 'significant' levels of financial distress at the end of Q3 2017, compared with 352,552 in Q3 2016.

The research highlights that 248,619 of these companies ended the period with negative net worth, representing a sizeable population of so called ‘zombie’ companies that have managed to survive thanks to the prolonged low interest rate environment and flexible labour market, but which do not have adequate working capital to fund any growth or absorb rising input prices.

Begbies Traynor warns that with the prospect of an imminent interest rate rise alongside increasing employment costs, due to changes in the minimum wage combined with HMRC's crackdown on PSCs (often set up to avoid employers' national insurance), many of these struggling companies will not have the reserves available to survive.

Ric Traynor, executive chairman of Begbies Traynor, highlighted the growing trend for problems emerging among PSCs, regardless of the level of interest rates, which he said ‘seem to be contributing more than their fair share of distress across multiple sectors of the economy.’

‘Following HMRC's crackdown on these businesses, many personal service companies are finding trading conditions particularly tough under the new regime. As a result, it is likely that we will see a trend of increasing insolvencies among this group, putting added pressure and costs on the larger companies and sectors that they serve,’ Traynor said.

The research also shows that ‘significant' financial distress rose across every sector and region of the UK over the past year, with the professional and financial services sectors being worst affected, increasing 42% to 26,113 and 34% to 11,079 struggling businesses respectively.

The support services, construction and general retail sectors had the highest volume of businesses in distress over the period, with 101,614, 57,338 and 35,895 companies respectively showing signs of 'significant' financial distress.

Geographically, the worst performing region of the UK by volume was London, where 107,896 companies ended the period in a state of 'significant' financial distress, an increase of 6% year on year; representing nearly a quarter of all UK businesses in distress.

Julie Palmer, partner at Begbies Traynor, said: ‘The number of firms experiencing 'significant' financial distress has reached unprecedented levels over the past 12 months, as businesses in search of growth have overstretched themselves, taking too many risks after being lulled into a false sense of security by the continued low interest rate environment.

‘Following a spate of downbeat economic updates, showing everything from rising inflation and increasing corporate insolvencies to slumping retail sales and the further decline of the UK's vital construction sector, our data shows that no segment of the economy has ended the period unscathed.

‘With consumers continuing to borrow using credit cards, personal loans and car finance at a rate almost five times faster than their growth in earnings, my biggest concern is on the UK's ever-expanding consumer credit bubble, which could burst at any minute, knocking the consumer industries and financial sector for six. While the prospect of an interest rate increase will of course go some way to addressing this, the knock-on effect for many struggling businesses with high levels of debt could be severe.’

Report by Pat Sweet

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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