Number of companies in ‘significant’ financial distress jumps 10% in Q2

The latest Begbies Traynor Red Flag Alert research has revealed a “particularly worrying” picture as the number of UK companies in “significant” financial distress jumped by nearly 10% in Q2 2024 to 601,950 businesses. The marked acceleration in the number of companies was driven significantly by the travel and tourism (20.1%), hotels and accommodation (16.4%) and bars and restaurants (12.2%) sectors. The growth in financial distress among these sectors reflects the ongoing weakness of consumer confidence in the UK, which is putting a “huge amount of pressure” on these consumer-facing sectors in the country. During Q2 2024, “critical” financial distress increased by 1.1% to 40,613 companies in the UK. This followed increases in the automotive (13.2%), industrial transportation and logistics (12.2%), health and education (8.4%) and bars and restaurants (7.3%) sectors. With a large number of the businesses in “critical” financial distress expected to enter insolvency over the next 12 months, the state of the construction, real estate, hospitality, financial and support services sectors continue to be of concern as companies from these sectors account for nearly 50% of the businesses in “critical” financial distress. Julie Palmer, partner at Begbies Traynor, said: “It is a particularly difficult situation for businesses in consumer facing sectors, such as hospitality. While a fall in inflation to more palatable levels will likely provide some relief, consumers simply aren’t behaving like they used to and these businesses, who are still grappling with higher costs pushed up by higher wages, are really struggling. “Many businesses who loaded up on cheap debt prior to the pandemic are simply not equipped to survive the current pressures and the financial burdens they face may ultimately prove too much.” Palmer continued: “Indeed, HMRC, which has been fairly lenient on companies repaying pandemic funding to date, will eventually tighten its grip and I expect this to push a considerable number of companies into insolvency over the next 12 months.” Ric Traynor, executive chairman of Begbies Traynor, said: “We are a little over halfway through the year and the macro-economic environment for UK companies remains extremely testing. There might be a greater sense of optimism in certain corners of the economy, but this is yet to translate into anything meaningful for the hundreds of thousands of businesses fighting for survival. “The situation for many British firms remains grave, with the latest Red Flag Alert data highlighting a substantial increase in the number of businesses in significant financial distress in comparison to this time last year.” Traynor added: “All eyes are now on our new Government as we ask ourselves what they can do to kickstart economic growth in the UK. Sadly, the reality is that the Government may not be able to act fast enough to stop many struggling businesses from succumbing to the economic pressures with which they are currently grappling. In short, the prevailing economic situation means that we still expect to see heightened levels of company insolvencies extend into 2025 and beyond.”