The number of companies in serious financial difficulty is increasing sharply
A growing number of UK businesses are at risk of bankruptcy as costs soar and Covid loan repayments come due, a report has found.
Construction and hospitality are the hardest hit sectors, according to insolvency firm Begbies Traynor.
Loan repayment schedules should be extended to ease the pressure, he said.
The government said it had offered businesses an “unprecedented package of support measures” and increased flexibility in repaying Covid loans.
In the first three months of this year, the number of companies in critical financial difficulty increased by 19% compared to the start of 2021, according to Begbies Traynor’s report.
Julie Palmer, a partner at the firm specializing in insolvency and restructuring, said that without further action to help struggling businesses, there would be a wave of corporate bankruptcies.
“It’s just a case of the dam holding him back eventually burst,” she said.
Begbies Traynor, which publishes regular health checks on the state of UK businesses, said its ‘Red Flag Alert’ research reflected the strain of two years of extraordinary financial pressures on thousands of businesses. He said 1,891 companies now fall into the critical category, suggesting their outlook is shaky.
Although Covid restrictions have been lifted, some businesses are still feeling the impact of supply chain disruptions and the price of energy and other inputs has risen sharply.
Businesses are struggling to recruit staff in some sectors and wage costs, including minimum wage and national insurance contributions, have risen.
With the cost of living rising, many UK households are looking for ways to save money, putting further pressure on businesses that rely on discretionary spending, such as bars and restaurants.
Begbies Traynor’s research highlights a sharp rise in county court judgments (CCJs), an early sign of future insolvencies, as they show creditors are making legal claims.
CCJs were up 157% from a year ago, according to the report. A blockage in court cases due to Covid meant the current level of CCJ was likely the tip of the iceberg, Ms Palmer added.
Government insolvency figures for March also illustrate the trend of more insolvencies. They show that creditor voluntary liquidations, the most common way for companies to liquidate themselves, more than doubled from the previous year.
During the acute phase of the pandemic, many companies relied on state support. But that support had now disappeared as businesses now faced a perfect storm of rising wages, energy and borrowing costs, Begbies Traynor said.
Ms Palmer said the government was faced with a choice: “Do they rush to claw back funds distributed during the pandemic to ensure there was a functioning economy afterwards? Or [do they] looking for ways to control the number of businesses that fail? »
“Having invested so much money in protecting businesses over the past two years, ministers will not want to see it wasted as businesses collapse, unable to service their debts,” she said.
She said leniency, or taking a longer-term view of Coronavirus Business Interruption Loan Scheme repayments, would help struggling businesses.
A government spokesperson said support for businesses during the pandemic included VAT cuts, holidays on business rates and government-backed loans worth around £400billion.
“We have given businesses increased flexibility in repaying their Covid-19 loans, with borrowers under the Bounce Back Loan program being able to extend their repayment tenure by ten years, as well as request repayment holidays,” added the spokesperson.