According to recent research by insolvency expert Begbies Traynor Group, the number of businesses in critical distress has risen by 1,891 in the first three months of 2022.
This rise in the number of businesses in critical distress, which means they are at risk of failing, is concerning, as it is almost a fifth higher than the same period last year. Begbies Traynor suggest in their “Red Flag Alert” report, that this is a sign of the financial pressure UK businesses have been under in the past two years.
The reason for this jump is the end to Covid support by the UK Government, combined with the hike in running costs for businesses.
Businesses In Critical Distress Could Become Failed Businesses
Begbies Traynor warns that we are facing a wave of businesses failing, as they report that County Court judgments, which are an indicator of future insolvencies, have risen by 157% in the first quarter of this year, compared to the same time last year.
March was the worst month, with 11,673 rulings, which is an increase of 179% on the monthly average for the previous two years. It’s also the highest number in one month in the past five year.
While many small businesses were able to cope with the extraordinary financial pressures the pandemic has brought with the help of Covid relief packages from the Government, this support has now stopped. And businesses are expected to repay the Covid support loans, which many are unable to do.
Begbies Traynor is therefore asking the Government to be more lenient to distressed businesses when it comes to these repayments to prevent a flood of insolvencies.
Taking a hard line on repaying CBILS and other loans would likely drive businesses over the edge, risking the billions fed into the economy being wasted, and the legacy of this support probably explains the year-on-year fall in significant financial distress.
Julie Palmer, Partner at Begbies Traynor
Especially, since the repayments are only one small part of the financial strain small UK businesses are under. Rising inflation and wages, a hike in energy costs and National Insurance Contributions (NIC) and low consumer confidence due to the cost of living crisis are all weighing heavily on the budgets of small UK businesses.
Growth Unlikely For Most Small Businesses This Year
With the financial pressures being so big, it is no surprise that almost 50% of small business owners don’t expect their business to grow this year. According to a survey conducted by the Federation of Small Businesses (FSB), which has questioned 1,200 small businesses.
55% of the businesses surveyed have also reported that they are operating below capacity. A major issue is rising running costs, with small businesses having seen their running costs rise by a whopping 87% compared to the same period last year.
The main factors for the rising costs are increasing fuel and utility costs as well as rising NIC contributions.
If businesses are unable to grow, they are more likely to struggle financially and become businesses in critical distress.
Staffing Issues
Another reason why many businesses are running below capacity are staff absences, according to the FSB survey. With Covid case numbers still being high in the UK, staff absences are higher than usual.
While the legal requirement to self-isolate has gone, the Government is still recommending people with a positive test or symptoms to self-isolate. And many companies are putting their staff’s safety first, and expect infected staff to stay at home.
A recent report by the British Chambers of Commerce has also highlighted the problems many businesses face in recruiting staff. With 78% finding it difficult to find staff.
While all sectors are affected, hospitality, construction, logistics and manufacturing firms are facing the biggest challenge when it comes to recruiting staff.
As a result, many companies will have to pay more to get the staff they need. But this puts further pressure on their finances, bringing them closer to becoming businesses in critical distress.
The British Chamber of Commerce therefore calls on the UK Government to take action.
The UK government needs to take concrete action to address labour shortages as they are a key factor in the economy’s stuttering recovery. If firms cannot get the people they need then productivity and revenue are two of the first casualties.
Jane Gratton, Head of People Policy at the British Chamber of Commerce
Unless small UK businesses are supported, not only with leniency regarding Covid relief payments, but also in terms of recruitment issues, we might see a further increase in the number of businesses in critical distress in the future.
Silver Lining
While the increase in the number of businesses in critical distress is concerning, there has also been some good news. A report by Xero has shown, that revenues at small businesses have risen by 13.5% in March.
While revenues are still below pre-pandemic levels, at a least there is some positive to hold on to.
