650,000 UK firms in ‘serious financial distress’ despite easing of restrictions, experts warn

Firms saddled with large debts could hamper recovery from pandemic, say insolvency practitioners

One in 10 jobs in town centres, from shop assistants to taxi drivers, under threat (Reuters)

The number of businesses in significant financial distress has jumped by a quarter over the past year to 650,000, according to insolvency specialists.

Begbies Traynor said that, while businesses have benefited from the ending of lockdown, "constant changes" to the government's road map have left many firms struggling to survive.

The insolvency advisors’ new report finds that there has also been a sharp rise in the number of "zombie" businesses which have taken on unsustainable debt through Covid loan schemes which they cannot repay.

Businesses that took on loans through the Bounce Back and CBILS schemes are now having to make their first repayments, 12 months after taking on debt at the height of the pandemic.

The report provided evidence that businesses which have been protected from insolvency by emergency measures brought in during the pandemic could soon face demands to repay debts.

Official figures show that court activity is picking up as creditors, especially landlords, become more aggressive in chasing debts, Begbies said.

Companies received 14,460 county court judgments during April, May and June - almost double the number lodged in the same period last year.

The government has yet to lay out how it will deal with billions of pounds of debt built up during the pandemic which analysts have warned could hamper the economic recovery.

Julie Palmer, partner at Begbies Traynor, said many companies remained in a fragile state, despite the removal of restrictions on 19 July.

“Although the reopening of the retail and hospitality sector has given the economy a boost in Q2, the number of zombie businesses remains considerable, with many in a fragile state," Ms Palmer said.

“Whilst 'Freedom Day' on 19th July has given many businesses a sense or normality, history suggests that unmanageable levels of debts and subsequent overtrading will eventually take their toll on these businesses."

Researchers used a scoring system which screens companies for a sustained or marked deterioration in key financial ratios and indicators including working capital, contingent liabilities and the amount of profits they have retained.

Ric Traynor, executive chairman of Begbies Traynor, warned that businesses faced living with sustained levels of debt for years to come

“Hidden risks abound for UK businesses and all represent a real threat to corporate survival in the short term," he said.

Among those is a shortage of supplies which has affected car makers, electronics firms and builders' merchants, among others.

Staff absence due to self-isolation and the limited availability of foreign/migrant labour due to Covid and Brexit is also having an impact, Mr Traynor said.

He predicts that these factors mean the number of businesses becoming insolvent is likely to increase in the latter months of this year and into 2022.