According to a report by advisory firm Quantuma, there was an 11% increase in company insolvency compared to 2020.
This means in 2021, 14,048 businesses have failed, compared to 12,635 in the previous year. Quantuma is predicting an increase in company insolvency by 20% in 2022 and expects that 19,000 businesses to fail by 2024, which will be the highest in the last decade.
As a result, over half a million employees have a 4-25 times higher risk of losing their jobs. This is down to 6,500 small and medium businesses currently having a higher than average risk of failing.
Why Has There Been Such An Increase In Company Insolvency?
According to the report, there were two main drivers that were responsible, Brexit and Covid. However, other challenges are added to the mix, making it even harder for UK businesses.
Brexit And Covid
Brexit has made it a challenge to trade with the UK’s biggest trading partner for most small and medium enterprises (SMEs), due to increased bureaucracy and costs. According to recent data from the Office for Budget Responsibility (OBR), Brexit is hampering the recover of the UK economy.
The pandemic and the restrictions and challenges that resulted from it, have had a huge impact on SMEs. Forced closures during lockdowns, supply chain issues, rising inflation and costs and the uncertainty of living in a pandemic have all contributed to small businesses struggling.
Government support, such as the furlough system, has now ended, but with case numbers are at a record high, many small businesses are still facing an uphill struggle.
Now in the recovery phase, the challenges have increased, with the war in Ukraine, tax rises, rising inflation and rising energy and fuel costs all exacerbating the already difficult situation for many small businesses. Which explains why Quantuma expects a 20% increase in company insolvency this year.
Research by energy consultancy Cornwall Insights has reported, that small businesses will see an average increase in gas bills of 250%.
Unlike for domestic energy bills, there is no regulated price cap for commercial contracts. This means that many small businesses will see their gas bills hike, especially if their business energy contract is due to end in April.
If the government does not want to see more businesses fail, higher product prices for consumers and resultant economic impacts, it will need to start giving some attention [to SME businesses].Craig Lowrey, Senior Consultant at Cornwall Insights
On top of that, inflation is still rising, National Living Wage has gone up this month, as have National Insurance Contributions. While Rishi Sunak has announced a rise in employee allowance by £1,000, combined with rising costs, this is only a small drop in the ocean and is unlikely to help many businesses cope with the challenges.
Where In The Country Is The Risk Of Insolvency Highest?
While the distress score, a measure of how likely a company is to fail in the next three to six months, is consistent across all regions, in terms of growth score, London is clearly behind other regions.
It might be a surprise to see that the capital’s growth rate is the lowest, with 43. However, this was to be expected, given the reliance of London on migrant workers and therefore free movement, which has ended since Brexit.
London’s hospitality, leisure, food and beverage and accommodation sectors have suffered heavily from lockdowns, working from home orders and travel restrictions. And while employees are slowly returning to offices, since Covid restrictions have been removed, with a distress warning score of 13, London is one point behind the other regions.
This means that the risk of an increase in company insolvency in London is slightly higher than in other regions.
In terms of the financial strength score, London has a score of 48, the same as the Midlands, Scotland and Wales. Only the North has a lower score with 47. The South West has the highest score, with 51.
When the growth and financial strength scores are combined, London is also lagging behind with 91. The South West has the highest combined score with 102. The other regions lie between 96 and 99.
Start-ups And Younger SMEs Are At Higher Risk
The report has shown that the majority of businesses between 0 and 3 years old are in the highest risk bracket, of 15-25%. This confirms that the first 3 years are crucial for the survival of a business.
In terms of sectors, eduction and mining are most at risk, whereas wholesale/retail has the lowest risk of insolvency.
The pandemic has changed consumer behaviour, with online shopping being more prevalent than ever. This shift is likely to be permanent, so in order to survive, small UK businesses will have to adapt to the changing conditions. With the predicted further increase in company insolvency numbers, this adaptation is curcial.
The fundamental shift in buyer behaviour and channel preference is likely to endure, resulting in an ‘adapt or die’ choice facing many thousands of the UK’s SME business owners.Quote from ‘The uneven recovery’ by Quantuma