Number of firms in distress soars amid ‘debt storm’ worries

By Staff

The number of firms on the brink of collapse jumped by more than a quarter at the end of 2023 as fears grow over a “debt storm” caused by the recent barrage of interest rate rises, a report has warned.

The latest Red Flag Alert report from insolvency specialist Begbies Traynor found that 47,477 firms were in critical financial distress in the final three months of last year.

That was up 25.9% on the previous three months and marked the second quarter in a row where critical financial distress had grown by about a quarter.

Begbies also said that 539,900 UK businesses were deemed to be in “significant” financial distress in the quarter, up 12.9% on the previous three months and 5.6% higher year on year.

Its report showed that all of the 22 sectors assessed saw an increase in critical financial distress.

The construction and real estate sectors were among the hardest hit, with increases of 32.6% and 24.7% respectively, as the onslaught of interest rate rises over the past two years has affected the housing market.

“Serious concerns grow over the construction and real estate sectors, which still represent nearly 30% of all businesses in critical financial distress,” according to Begbies.

The report lays bare the impact of high costs, interest rate increases and consumer spending woes in 2023, which has taken its toll on UK companies.

But the group also warned over a “debt storm” for firms that are struggling amid high borrowings built up in times of ultra-low interest rates.

Julie Palmer, a partner at Begbies Traynor, said: “Now that the era of cheap money is firmly a thing of the past, hundreds of thousands of businesses in the UK, who loaded up on affordable debt during those halcyon days, are now coming to terms with the added burden this will have on their finances.”

She added: “For some, a better-than-expected Christmas may kick these concerns down the road for a little longer, but the rapid growth in the levels of critical financial distress point to an economy that is waking up to the danger of debt-laden businesses in a higher rates environment.

“Sadly, for tens of thousands of British businesses who should be looking ahead to 2024 with some degree of optimism, the new year will bring a fight for survival as the debt storm that has been brewing for years looks like it is breaking across the country.”

Last year saw the collapse of budget retailer Wilko, which led to the loss of more than 12,000 jobs and has left holes in many high streets across the country.

Since then, signs of distress has been spreading to other non-consumer facing sectors as the impact of the Bank of England’s rate rise campaign to bring down inflation has intensified.

A raft of housebuilders have warned over profits, with others across the construction and real estate sectors also under pressure as property prices have slumped.

Once estate agency, Purplebricks, was sold last May to Charles Dunstone-backed rival Strike for £1 with all of its more than 750 staff put at risk of redundancy.

There are hopes that interest rates may start to come down in 2024, but Begbies Traynor executive chairman Ric Traynor said this may not be enough to save many firms.

“Unfortunately, there are no signs of an easy fix and, with geo-political uncertainty continuing to rise and a hike in the national wage around the corner, the backdrop is hardly improving for an economy that is still firmly in recovery mode post-pandemic,” he said.

Here is a list of the companies seen as being on the edge of collapse by region or nation:

  • London – 14,221
  • South East – 7,884
  • Midlands – 5,696
  • North West – 4,951
  • Yorkshire – 3,303
  • South West – 3,271
  • East of England – 2,960
  • Scotland – 2,245
  • Wales – 1,360
  • North East – 836
  • Northern Ireland – 747

North West: Strong sectors have been hard hit

In the North West of England, sectors with many companies in distress included construction, real estate, support services and professional services which, together.

Gary Lee, partner at Begbies Traynor, said: “2024 has been a challenging start for SMEs in our region. There’s no doubt that the build-up of pressure from last year continues to have a major impact and this latest data demonstrates the size of the problem for businesses in the North West.

“Recent inflation figures announced compound the threats even further for business owners struggling to stay on top of things as those in their supply chain pass greater costs on in order to survive.

“The fact that more than half of these companies in significant distress operate in the traditionally strong sectors of construction, property, professional and support services is of grave concern for everyone doing business in these areas.

“With a General Election looming later this year, it is feasible we could see further support for businesses being announced in the next Budget. It remains to be seen whether this would be too little too late for many of the firms in our region included in our numbers.

“These new figures are a stark reminder for company directors to act quickly and decisively in order to generate more options for rescue than if they bury their heads in the sand.”

Share This Article
Leave a comment

Leave a Reply

Your email address will not be published. Required fields are marked *