Half a million firms in ‘significant’ financial distress as Britain’s economy stagnates

Firms struggling with high interest rates, brittle consumer confidence and high levels of debt accrued during the pandemic

A shopper passes a closing down sale sign (PA) (PA Archive)

More than half a million firms in Britain are in “significant” financial distress, with thousands facing insolvency over the coming months as Britain’s economy continues to stutter, a new report has said.

Begbies Traynor, one of the UK’s biggest insolvency practitioners, said firms continued to struggle with the same pressures as last year, such as high interest rates, brittle consumer confidence and high levels of debt accrued during the pandemic.

Its “Red Flag Alert” research showed that a total of 554,554 businesses, in all major sectors of the economy, are now in “significant” financial distress - a 30 per cent rise since last year.

The number of businesses in “critical distress” has jumped by 20 per cent last year, with with 40,174 UK businesses affected. Begbies Traynor said that insolvency rates are at “historically elevated levels” as firms are servicing debt at higher interest rates.

The Bank of England hiked interest rates from 0.1 per cent in 2021 to the currrent base rate of 5.25 per cent in an attempt to combat skyrocketing inflation.

However, this has increased the cost of borrowing for UK businesses, and has meant that it is more expensive servicing debt firms have have accrued to keep themselves solvent during the Covid-19 pandemic.

Julie Palmer, Partner at Begbies Traynor, said: “Despite some optimism as we entered the new year, 2024 has so far been characterised by a continuation of the same pressures that plagued companies in the UK throughout 2023.

“Since the pandemic, hundreds of thousands of UK businesses depleted their financial reserves and loaded their balance sheets with increasingly unaffordable debt which for many may simply be too great to bear.

“As with the prior quarter, the picture is particularly concerning in the consumer facing sectors. We are starting to see this translate into larger companies entering insolvency, a trend that I expect to continue while consumer confidence remains uncertain.

“On top of that, the higher levels of financial distress in bellwether sectors such as real estate and construction point to a troubled UK economy.

“Right now, many companies will be pinning their hopes on a meaningful cut to interest rates later this year, but the Bank of England continues to be hawkish, so it is unlikely to make a cut in the near-term given inflation is still higher than expected.

“All of this means that these pressures are here to stay, and I fear this will result in thousands of businesses failing in the coming months as the constant pressures will become too great for many.”

Begbies Traynor’s downbeat latest research comes off the back off surprising insolvency data released on Friday.

The Insolvency Service said that the number of registered company insolvencies in England and Wales in March 2024 was 1,815 - which is 17 per cent lower than in February 2024.

Responding to the latest figures, David Hudson, restructuring advisory partner at FRP, said: “High levels of insolvency were already baked into expectations for this year so any sign of a slowdown in volume is welcome.

“That said, with economic growth remaining weak and many pausing investment in anticipation of a General Election, it’s highly likely that more businesses – many still saddled with post-Covid debts – will falter under the weight of elevated input and borrowing costs.

“This week’s volatility in the mortgage market will do little for consumer demand and suggests that the base rate is unlikely to fall as quickly as many had hoped.

“So, while sectors like construction, retail and hospitality continue to be the most affected in terms of insolvencies, few industries remain immune to risk as more firms go through refinancing processes and see a significant increase on their balance sheet.”