Business distress reaches 'unprecedented' levels, new figures show

Published
01/11/2017 by

The number of companies experiencing 'Significant' financial distress has reached unprecedented levels over the past 12 months, new research from the UK's leading independent business recovery experts has shown. 

According to Begbies Traynor’s Red Flag Alert research for Q3 2017, which monitors the financial health of UK companies, 448,011 businesses were experiencing ‘Significant’ levels of financial distress at the end of the quarter, up 27% compared the same period last year (Q3 2016: 352,552). 

The trend was reflected in Birmingham, where 6,749 firms faced 'Significant' financial distress in Q3 this year - up 22 per cent (5,517) on the same time in 2016. Amongst those sectors faring worst were travel and tourism (up 38 per cent), construction, which rose from 474 firms in Q3 2016 to 562 in the same period this year, food and drug retailers (up 24 per cent from 286 to 354) and industrial transportation and logistics, which rose 50 per cent to 167.

Across the Midlands as a whole, there were 54,866 firms in 'Significant' distress - up 25 per cent against 44,007 for the same quarter in 2016.

The research highlights that almost 250,000 of these companies (Q3 2107: 248,619) 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. 

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. Meanwhile, the UK’s 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. 

Mark Malone, Partner at Begbies Traynor's Birmingham office, 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, perhaps taking more risks because of continued low interest rates. Following the latest economic updates, showing everything from rising inflation and slumping retail sales to the further decline of the construction sector, our data suggest that almost all sectors and industries have been adversely affected. 

“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, our biggest concern is the UK’s ever-expanding consumer credit bubble; which could burst at any time."

Ric Traynor, Executive Chairman of Begbies Traynor, commented: “Despite the IMF slashing the UK’s economic growth outlook on account of the weak pound and spiking inflation, UK GDP has continued to increase ahead of expectations over the past three months. With this representing the 19th consecutive quarter of GDP growth, the prospect of an interest rate hike this week seems all the more likely, which will be worrying news for many firms who have been relying on low rates to keep their heads above water."