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The number of UK firms in financial distress continues to climb with no sign of slowing
Thursday 24 Oct 2019 Author: Ian Conway

Last week saw the release of the latest ‘Red Flag Alert’ report from insolvency firm Begbies Traynor (BEG) covering the third quarter of 2019.

The total number of UK businesses in ‘significant financial distress’ is now 489,000, an increase of 22,000 or 2.5% over the previous year. More importantly, it represents an increase of 139,000 companies or 40% since the 2016 EU referendum.

TROUBLED TIMES

Begbies classifies companies as in ‘significant’ distress if they have minor county court judgements (CCJs) of under £5,000 filed against them or they have shown up on the firm’s proprietary Red Flag credit-risk scoring system.

Factors affecting companies’ credit-risk score include a marked deterioration in key financial ratios such as working capital, contingent liabilities, retained profits and net worth.

According to the report, over the past year ‘significant financial distress has increased in 20 out of the 22 sectors monitored’ and is affecting a broad spectrum of companies.

There has also been a significant increase in the number of companies in ‘critical financial distress’ – that is with CCJs of more than £5,000 and a poor score on the Red Flag model, which is typically a precursor to formal insolvency.

NO LONGER ‘SAFE AS HOUSES’

The most severely-affected sectors are real estate and property, construction, retail and travel. The real estate and property sector has seen a 16% increase in businesses in ‘significant’ distress since last year with more than 50,000 firms now struggling. Falling residential and commercial property prices have impacted property investors particularly hard.

The construction sector has seen an 11% increase in companies in ‘significant’ distress to more than 13,000 firms, with the trend extending to companies involved in constructing commercial buildings. This is significant as the construction industry is a big employer.

NOT JUST ON THE HIGH STREET

The tough conditions on the high-street have been well documented, but now the malaise in the retail sector seems to be spreading online.

Whereas e-commerce had previously been viewed as ‘immune to the travails of the sector’ as the report puts it, online retail has seen a 10% increase in the number of companies in  ‘significant’ distress in the last year to more than 9,000. Since the EU referendum, more than 30,000 retailers have found themselves in ‘significant’ distress.

The root cause of the problem, according to Julie Palmer, partner at Begbies, is that ‘investment is on hold as businesses have their hands tied, not knowing what the state of play will be post-Brexit and whether the agreements or contracts they currently have in place will still be valid following the expected withdrawal’.

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