Last checked at 1 Nov 2017 07:00
Business distress on the rise ahead of interest rate decision
c.450,000 UK businesses now suffering from 'significant' financial distress; up 27% year on year
Ahead of Thursday's decision by the Monetary Policy Committee on whether or not to increase interest rates, new research from Begbies Traynor, the UK's leading independent insolvency firm, reveals that nearly half a million businesses across the UK are in a state of 'Significant' financial distress, even before the effects of a potential interest rate hike are felt.
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 to the same period last year (Q3 2016: 352,552); a worrying statistic that could increase still further should interest rates rise this week.
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.
Begbies Traynor warns that with the prospect of an interest rate rise alongside increasing employment costs, due to changes in the minimum wage combined with HMRC's crackdown on personal service companies (often set up to avoid employers' national insurance), many of these struggling companies will not have the reserves available to survive.
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.
Geographically, the worst performing region of the UK by volume was London, where 107,896 companies ended the period in a state of 'Significant' financial distress, an increase of 6% year on year; representing nearly a quarter of all UK businesses in distress.
Julie Palmer, Partner at Begbies Traynor, 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 themselves, taking too many risks after being lulled into a false sense of security by the continued low interest rate environment. Following a spate of downbeat economic updates, showing everything from rising inflation and increasing corporate insolvencies to slumping retail sales and the further decline of the UK's vital construction sector, our data shows that no segment of the economy has ended the period unscathed.
"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, my biggest concern is on the UK's ever-expanding consumer credit bubble, which could burst at any minute, knocking the consumer industries and financial sector for six. While the prospect of an interest rate increase will of course go some way to addressing this, the knock-on effect for many struggling businesses with high levels of debt could be severe."
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.
"Regardless of whether interest rates rise or fall on Thursday, there is also a distinct trend emerging among personal services companies, who seem to be contributing more than their fair share of distress across multiple sectors of the economy.
"Following HMRC's crackdown on these businesses, many personal service companies are finding trading conditions particularly tough under the new regime. As a result, it is likely that we will see a trend of increasing insolvencies among this group, putting added pressure and costs on the larger companies and sectors that they serve."
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For further information, contact:
MHP Communications
Katie Hunt / Giles Robinson / Calum MacDougall / Alice Osborn / Peter Lambie
Tel: 0203 128 8570
Email: Begbiescorporate@mhpc.com
About Red Flag Alert
Red Flag Alert has been measuring and reporting corporate financial distress since 2004, and over that time has become an industry benchmark of the underlying health of companies across every sector and region of the UK.
Through its unique algorithm, the Red Flag Alert 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. Please note that the Red Flag Alert algorithm was refreshed in Q3 2017 to enhance the risk factors analysed in the data. The reported results have been backdated to ensure 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
About 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 through two complementary operating divisions.
Business recovery and financial advisory services
Begbies Traynor is the UK's leading independent business recovery practice, handling the largest number of corporate appointments, principally serving the mid-market and smaller companies.
BTG Financial Consulting provides transactional support, valuations and advisory services.
We provide these services to businesses, professional advisors, other stakeholders, investors and financial institutions, working with all the major UK clearing banks.
Property services
Eddisons is a national firm of chartered surveyors, delivering advisory and transactional services to owners and occupiers of commercial property, investors and financial institutions. The division includes Pugh & Co, the largest regional firm of commercial property auctioneers by number of lots.