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Begbies Traynor suggests 630,000 UK businesses are in “significant financial distress".

Updated: Jun 26, 2021

According to the most recent Red Flag Alert research from Begbies Traynor, there were 630,000 UK businesses in “significant financial distress” in Q4 2020. The figure represents the largest numerical quarterly leap since Q2 2017, increasing 13 per cent (73,000 businesses) from 557,000 businesses in Q3 2020, and a year-on-year increase of 27.5 per cent from Q4 2019.

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Significant financial distress

Red Flag Alert research classifies a state of “significant financial distress” as being when a business has a minor CCJ (County Court Judgement) of £5,000 or less filed against them or when they have been identified by Red Flag Alert’s proprietary credit risk scoring system. This system screens businesses for significant or sustained deterioration in their key financial rations, such as working capital, net worth, retained profits etc.

The research monitors 22 sectors of UK business and found that 18 sectors experienced double digit increases in Q4 2020. Begbies Traynor warned that the figures are likely to only represent the tip of the iceberg, with COVID-19 reducing court activity and limiting the number of CCJs and winding-up petitions being filed against companies with high levels of debt. There has also been a ban on winding-up petitions being issued for COVID-19 related debts.

Illustrating this likelihood, Q4 2020 actually saw a 31 per cent year-on-year fall in the number of CCJs lodged in Q4, with 9,716 lodged in Q4 2020, down from 14,030 for the same period in 2019. This is also the case with winding-up petitions, which fell 85 per cent from 644 in Q4 2019 to just 94 in Q4 2020.

Julie Palmer, Partner at Begbies Traynor, commented:

"These figures give an insight into some of the financial stresses that have been building in UK business. Without the financial aid and support measures that the Government has put in place during the pandemic insolvency levels would have been much higher, however the sad truth is that for many companies this will provide little more than a stay of execution as debt levels become unmanageable and structural changes across many sectors take their toll.”

"The announcement of the latest national lockdown will do little to help and even the chancellor has reiterated that he cannot save every business. And the harsh reality is that the Government will have to be ruthless when handing out rescue funds, because not all businesses will be sustainable, even when the flood waters subside.”

"Although the Government has extended its COVID-19 financial support, this simply won't be enough for thousands of businesses who likely will not survive in the interim. Although the UK's announcement of a trade deal with the EU and the roll-out of COVID-19 vaccines offer some light at the end of a very dark tunnel, the situation is going to remain bleak over the next quarter and beyond.”

In terms of individual sectors, financial services saw a particularly noticeable increase in distressed businesses, which rose 38 per cent year-on-year, from 12,587 in Q4 2019 to 17,423 in Q4 2020, this also represented a 24 per cent increase from Q3 2019. The sector has been particularly hit by ongoing Brexit uncertainty, as well as the pandemic.

Real estate and property also saw a significant increase, with distress rising 39 per cent from 53,224 in Q4 2019 and 18 per cent from 62,615 in Q3 2020, to almost 74,000 in Q4 2020. In the construction sector, Q4 2020 saw slightly over 80,000 distressed businesses, up 27 per cent from just over 63,000 in Q4 2019 and up 11 per cent from 72,402 in Q3 2020.

Hospitality, a sector in which businesses are currently particularly reliant on government support schemes for their survival, is also among the worst hit. Hotel and accommodation businesses in distress increased 32 per cent year-on-year from 5,659 in Q4 2019 to almost 7,500 in Q4 2020, this was also an 18 per cent quarterly increase, from 6,327 in Q3 2020.

Begbies Traynor Executive Chairman Ric Traynor said:

"UK businesses have been dealt another body blow by the latest national lockdown. 2020 was a devastating year for thousands of businesses as they fell deeper into financial distress and Q1 2021 seems to be offering little hope of an upturn in the market. The Government's extended furlough and financial support measures will provide some relief and certainly save a significant number of businesses from entering into insolvency in the short term.”

"There are many zombie businesses that have been hanging on by a thread for years before this pandemic. The period post government support may well see a shake out of these struggling businesses and ultimately leave the stronger businesses to grow and create a more robust and dynamic economy in the medium term."

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