The number of companies in ‘critical financial distress’ have jumped by 25% compared to the same period in 2021 to 2,090, and up 7% on this year’s Q2, reveals the latest Begbies Traynor Red Flag alert report .
With inflation over 9%, and inflation in the ‘real economy’ likely exceeding this, businesses now face the very real prospect of interest rates climbing above 5%, a move that could force distressed businesses to enter insolvency as debt built up over the last decade and rapidly added to during the pandemic becomes unserviceable.
Many of these ‘zombie’ businesses, which benefitted from Government-backed Covid support loans, now face a series of risks ranging from soaring interest rates, to rising costs and declining demand, meaning that in many cases the growing challenges may prove too much.
The most recent company CCJ data reveals further evidence of the level distress in the economy today. Often an early indicator of financial distress, the data shows the number of CCJs for the first nine months of 2022 was 63,831 – more than the entirety of either 2021 or 2020 and nearly the second highest total since 2010.
Similarly, Winding Up Petitions, a much more serious action lodged by creditors, were 237% higher than the same period 2021, showing that companies are utilising aggressive legal enforcement measures to recoup debts.
Begbies Traynor partner Julie Palmer said the growing number of companies in a critical financial distress was of particular concern:
“We are now in an environment that we have not seen for many years, with a dangerous mix of rapidly rising inflation, escalating interest rates and crumbling consumer confidence.
“The economy, which had already been weakened by two years of pandemic disruption, now faces the very real possibility of a recession at a time when businesses were in desperate need of a sustained period of stability so they could get back on their feet.
“What we have instead is a situation where input costs are soaring and businesses that
borrowed to survive for years and are stuck with levels debt that they may be unable repay – especially with interest rates expected to rise to circa 6% in 2023.
“The economic turmoil is also having a stark effect on consumer confidence, and I remain
particularly concerned about sectors most exposed to discretionary consumer spending,
namely Bars & Restaurants, Leisure, and General Retailers. These businesses were some of the worst affected by pandemic chaos and now their customers are reining in discretionary spending, something we can clearly see in this Red Flag data.”
She said that after several years of volatility, the directors of businesses up and down
the country were now facing very difficult decisions. They had to decide whether to soldier on or give in, as they realised their businesses may not be viable if interest rates continued to rise as many economists expect.
“For the time being, many will continue to resist but interest rates will continue to rise, energy costs will remain stubbornly high, despite the Government’s intervention, and consumers are reining in spending, so the future is far from bright when we look into 2023.
“I fear that many directors who fought through Covid will soon conclude that getting through 2023 and 2024 is a bridge too far after the troublesome period they have just battled through.”
