Businesses are increasingly struggling as Covid debt, inflation and reduced consumer spending led to a surge in insolvencies in 2022, a specialist firm has said.
A report by Begbies Traynor reveals “intense strain” on an increasing number of companies as they are hit by rising labour and materials costs, higher energy bills and an economy likely heading into recession.
There was an 11% rise in critical and a 24% surge in significant distress levels in businesses in the final quarter of 2022 compared to Q4 2019, before the pandemic took hold.
More than 600,000 businesses across the UK were in ‘significant’ financial distress, 4% higher than a year ago. Significantly, there were nearly 24,000 County Court judgments (CCJs) served in the final three months of 2022; 52% up on 2021’s level and 77% higher than pre-Covid.
Julie Palmer, partner at Begbies Traynor, said: “What we are hearing from directors of businesses is extremely distressing.
“We came into 2022 hopeful that the pandemic was fully behind us and better times were ahead, only for Russia’s invasion of Ukraine to unsettle the global economy, leading to spiralling inflation and soaring energy bills and laying the foundations for what looks like a global recession. In the UK, in particular, strikes are just piling on the pressure as staff struggle to get to work and customers stay away.”
Surge in insolvencies
Top 10 sectors in significant financial distress (number of businesses)
- Support Services (94,900)
- Real Estate & Property (86,900)
- Construction (77,100)
- Professional Services (42,000)
- Telecoms (41,200)
- General Retailers (38,100)
- Health & Education (31,700)
- Media (25,600)
- Manufacturing (21,900)
- Bars & Restaurants (18,900)
The report, which has been monitoring British businesses for over 15 years, revealed a 36% increase in the number of companies rated as being in “critical financial distress” in the final quarter of 2022, compared to the same period a year ago, and 10% higher than in the preceding quarter.
This is the sixth consecutive quarter that businesses in critical distress levels have risen. Smaller companies are particularly vulnerable.
“We’re taking calls from company bosses who are having trouble digging deep enough to keep battling on,” added Palmer.
“They are already having to pay back the support they took to get through Covid and, anecdotally, we are hearing that both the government and HMRC are becoming more determined in pursuing debts, while other creditors are increasingly turning to the law to recover their debts.
“Throw in such a gloomy economic outlook, with inflation at 40-year highs and interest rates at levels not seen for 14 years, and you can see why more companies are starting to feel the burden of their debts, making directors question whether they can go on.”
Winding-up petitions, a more serious legal action than CCJs, totalled 576 in the same period, a rise of 131% compared with 2021.
Begbies Traynor’s findings come at a time when government is scaling back help for companies with rising energy bills.
Critical distress levels among hospitality businesses surged 157% against last year’s data. A high proportion of the fixed costs of these businesses is energy-related and there is concern that post-April 2023, there could be a spike in insolvency rates in this sector due to the modest level of government assistance.
Additionally, many of these businesses will face further distress as repayments on Covid-related debts become due. These factors, combined with falling consumer demand, could wreak havoc on an already vulnerable sector.
Ric Traynor, executive chairman of Begbies Traynor, commented: “Although we are – hopefully – about to pass the peak of inflation and the UK looks to have avoided recession at the end of last year, the strain is very clearly showing on businesses, as insolvency rates accelerate.
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“Interest rate hikes look set to continue into Q2 2023 placing further strain on the finances of both businesses and consumers. This, combined with a far less generous business energy support scheme and legacy Covid debts, do not bode well for many SMEs, and I fear that failure rates will continue to rise well into 2024.”
