Businesses braced for insolvency storm to hit home, as pandemic state aid and protection from creditors is shut off

·      589,168 UK businesses reporting significant financial distress during final quarter of 2021, a 5% rise on the previous three months

·      106% rise in County Court Judgments (CCJs) - a key early sign of future insolvencies as creditors are now actively using courts to recover debts

·      As Covid reliefs unwind, financially distressed companies brace for full force of debts to hit

·      Pressure ratcheting up almost across the board, with only one sector of the 22 covered by the "Red Flag Alert" (RFA) research showing an improved position

·      Situation even worse for companies already teetering on the brink of failure, with critical financial distress up 7% year-on-year in the final three months of 2021

Begbies Traynor's "Red Flag Alert", which has monitored the financial health of British companies for the past 15 years, now paints a particularly worrying picture for UK businesses with increasing numbers falling victim to pressures which have been building since coronavirus began piling up problems in the economy almost two years ago.

The latest data indicates that the debt storm which has been brewing for years, but had been held off by measures to provide breathing space for companies, could now be about to hit, sending shockwaves through many industries.

Julie Palmer, partner at Begbies Traynor, said: "Businesses that have bravely battled through the pandemic could now start to fail as the pressures they face become too much.

"Support from the Government such as furlough payments, tax reliefs and a moratorium on landlords being able to evict businesses due to rent arrears cannot go on forever.

"Without these measures in place to protect them, a rising number of companies will have no other option but to relinquish their business after two years of struggling on in the economic uncertainty that has been tempered by measures to combat the impact of coronavirus.

"The lag effect of the economic fallout from Covid, plus significantly higher inflation, has created a perfect economic storm for many companies, particularly the UK's SME sector, which will undoubtedly drive insolvency rates even higher."

According to Ms Palmer, inflation is now the greatest threat to the economy with the true rate potentially running far beyond the official 5.4% rate and possibly many multiples more than the Bank of England's target of 2%. Today, rising wage, energy and materials costs mean the CPI figures are showing only part of the story in the UK and the subsequent impact on the public's disposable income is expected to be far greater.

She continued: "The construction sector looks particularly vulnerable as raw material availability, combined with record inflation, has significantly reduced the margins for many SMEs. We are also seeing evidence of over-trading within construction as the sector's boom post-lockdown has caused real cashflow issues that are now impacting on businesses."

Although official Government support measures are unwinding, Ms Palmer says there are indications that the authorities are willing to help businesses which are trying to fight on.

She added: "Anecdotally, we are hearing stories about HMRC giving companies two or even three years to pay their tax bills.

"Extra leniency may not be an official policy, but it sends a signal that officials are trying to help businesses survive - even though it might only be delaying the inevitable."

* Number of companies exhibiting significant financial distress.

Ric Traynor, Executive Chairman of Begbies Traynor Group plc, commented:

"The growth in significant financial distress is very concerning and provides further evidence of the pressure the current economic backdrop is placing on UK businesses. With nearly all sectors experiencing a deterioration of their financial position since the last quarter, the ongoing supply chain issues and a 30-year record for inflation are less than ideal for companies that have already been hard hit by the pandemic.

"This new data, combined with the recently published Government insolvency statistics which highlighted a 33pc rise in corporate insolvencies in December 2021 vs December 2019 demonstrates that 2022 is going to be very difficult for many SMEs.

"Aggressive creditor action is often seen as a leading indicator for insolvencies, and the 100%+ increase in CCJs demonstrates that companies are taking a tougher line on recovering debts, in many cases to ensure their own survival.

"Ultimately, these market dynamics, on top of the withdrawal of government support measures and protection, is likely to lead to a rapid acceleration in insolvency rates over the course of 2022 and beyond."

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Notes to Editors

"Significant distress" is defined as businesses with minor CCJs (of less than £5k) filed against them or which have been identified by Red Flag Alert's proprietary credit risk scoring system which screens companies for a sustained or marked deterioration in key financial ratios and indicators including those measuring working capital, contingent liabilities, retained profits and net worth.

"Critical distress" is defined as businesses with minor CCJs (of more than £5k) filed against them

In England and Wales, County Court Judgments (CCJs) are legal decisions handed down by the County Court. Judgments for monetary sums are entered on the statutory Register of Judgments, Orders and Fines, which is checked by credit reference agencies to assess the creditworthiness of individuals and businesses.

About Red Flag Alert

Begbies Traynor's Red Flag Alert has been measuring and reporting corporate financial distress since 2004. It has become a benchmark on the underlying health of companies across every sector and region of the UK. 

Red Flag Alert's algorithm measures corporate distress signals, drawing on factual legal and financial data from a wide range of relevant sources, including intelligence from the UK's leading insolvency business, Begbies Traynor. The algorithm was refreshed in Q3 2017 to enhance the risk factors analysed in the data. The reported results have been backdated to ensure the consistency of comparative data.

The release refers to the numbers of companies experiencing 'Significant' problems, which are those with minor CCJs (of less than £5k) filed against them or which have been identified by Red Flag's proprietary credit risk scoring system which screens companies for a sustained or marked deterioration in key financial ratios and indicators including those measuring working capital, contingent liabilities, retained profits and net worth. 

Red Flag Alert is commercially available to all businesses, on an annual subscription basis, to help them better understand risk and exposure and help prepare them for the future. Further information about Red Flag Alert can be found at: www.redflagalert.com 

Economically active businesses exclude those that are flagged by Companies House as being, Non-trading, Listed for Strike off / Strike off pending, Insolvent or Dissolved. Companies, where there is insufficient information available for RFA to assign a health rating, are also excluded.

Begbies Traynor Group

Begbies Traynor Group plc is a leading business recovery, financial advisory and property services consultancy, providing services nationally from a comprehensive network of UK locations. The group has more than 900 staff and partners and the professional staff include licensed insolvency practitioners, accountants, chartered surveyors and lawyers.

The group's services include:

Business recovery and financial advisory

Corporate and personal insolvency - we handle the largest number of corporate appointments in the UK, principally serving the mid-market and smaller companies.

Corporate finance - buy and sell side support on private company transactions.

Financial advisory - forensic accounting and investigations, debt advisory, business and financial restructuring, due diligence and transactional support.

Property advisory and transactional services

Valuations - valuation of property, businesses, machinery and business assets.

Property consultancy, management and planning - building consultancy, commercial property management, specialist insurance and vacant property risk management, transport planning and design.

Transactional services - sale of property, machinery and other business assets through physical and online auctions; business sales agency; commercial property agency focussed on northern and eastern England.

Further information can be accessed via the group's website at www.begbies-traynorgroup.com/investor-relations