650,000 businesses in the UK are facing “significant financial distress”, according to corporate restructuring firm Begbies Traynor’s latest Red Flag Alert research.
Based on data collected from the second quarter of 2021, it’s the second highest distress level ever recorded by the research. This is, however, a 10% drop since the highest recorded number of significantly distressed businesses in the first quarter of 2021 of 723,000.
This comes after the economy reopened and allowed some companies to pay down some of their more critical debt in order to avoid court actions. The research found that, despite the second quarter improvement in the financial performance of businesses, the number of significantly distressed companies is still 24% higher than the same time last year.
Commenting on the news, Begbies Traynor’s partner Julie Palmer said: “Although the reopening of the retail and hospitality sector has given the economy a boost in Q2, the number of zombie businesses remains considerable, with many in a fragile state.
“Covid has dramatically accelerated the UK’s zombie business population, with many businesses taking on unsustainable government backed debts during the pandemic in order to survive. With constant changes to the UK roadmap out of lockdown, many remain in a precarious position, with any future lockdowns likely to impact insolvency rates.
“Whilst ‘Freedom Day’ on 19 July has given many businesses a sense of normality, history suggests that unmanageable levels of debts and subsequent overtrading will eventually take their toll on these businesses.
“Yet, the last quarter has demonstrated that it’s not all doom and gloom for businesses. Consumers want to spend, businesses want to expand and adaptation provides and opportunity for fresh shoots in the economy.”
According to the research, the leisure and cultural activities sector has bounced back since the easing of lockdowns during the second quarter of 2021 - with a 10% decrease in the number of businesses in significant financial distress compared to Q1. There has, however, been a year-on-year increase of 21%.
The residential property market, meanwhile, has struggled with only a 6% quarterly decrease in the number of businesses in significant financial distress.
Distress by location
Across all the UK regions, there’s been a quarterly decline in the number of companies in significant financial distress. Annually, however, each region has recorded at least a 16% increase.
One of the greatest annual increases has been seen in Northern Ireland, going up by 28% between the first and second quarter of 2021. This could be, according to Begbies Traynor’s analysts, due to the uncertainty surrounding Brexit negotiations in the country.
Due to its reliance on the leisure and hospitality and financial services sector, London has been the most vulnerable region during the past year as a result of the short-term effects of Covid-19. As such, businesses in London have experienced a 28% year-on-year increase in significant financial distress, also recording the lowest quarter on quarter decrease of all regions, at 9%.
Commenting on the findings, Begbies Traynor executive chairman Ric Traynor said: “The latest 10% fall in distress is welcome news with the staged reopening of the economy boosting cashflow and allowing companies to pay down some of their most pressing debt.
“However, one swallow does not make a summer and UK businesses are likely to face challenges as pent-up demand is expected to tail off later in the year and during 2022. Unfortunately, businesses still have a very long way to go before they can return to a sound financial footing, with many facing a legacy problem of managing significant debt for many years to come.
“Hidden risks abound for UK businesses and all represent a real threat to corporate survival in the short-term. The first is overtrading - many businesses are experiencing high demand and failure to manage their funding lines presents a real threat to their viability as many will simply run out of cash.
“Secondly, key component availability is likely to be a key pinch point for manufacturers - this is not just semiconductors but across a whole range of raw materials which will severely restrict the ability of companies to get products out of the factory gate. Thirdly, staff absence due to both the current growth in infection rates and the UK’s self isolation ‘pingdemic’ and finally limited availability of foregin/migrant labour due to Covid and Brexit, particularly affecting the hospitality sector.
“These risks combined with the gradual withdrawal of government support measures and protection are likely to see an acceleration in insolvency rates late Q3 and into 2022. However, despite the pandemic, there are many businesses that have adapted or were well suited to these conditions and they are starting to grow and recruit now that the economic picture is becoming rosier.”