Businesses in critical distress surge by a quarter in Q3, Begbies finds

Almost 40,000 UK businesses are now in ‘critical’ financial distress, up by nearly 25% between Q2 and Q3 2023, with the number now standing at 37,722, according to new findings from Begbies Traynor.

Almost 480,000 businesses are in ‘significant’ financial distress, 8.7% higher than Q2 and 4.7% higher than the same period in 2022, as the pressure of higher interest rates, resilient inflation and weaker consumer confidence has continued to hit business this year.

In its latest ‘Red Flag Alert’ report, Begbies Traynor warned that a “new world of elevated interest rates will continue to push many businesses to the very edge of failure”.

Construction, Real Estate and Property Services and Support Services have driven the rise of companies in critical financial distress, up by 46%, 38% and 28% respectively. 

Construction and Real Estate companies now account for almost 30% of all companies in critical financial distress as the slowdown in the residential housing market “continues to bite”. 

In addition, a rise of businesses in critical financial distress was seen in the retail sector, with Food and Drug Retailers up 33% and General Retailers up 14% quarter on quarter.

Julie Palmer, partner at Begbies Traynor, said: “Tens of thousands of British companies are now in financial dire straits now that the era of cheap money is firmly behind us.

“Businesses that had loaded up on debt at rock-bottom rates, and were only able to cling on during the pandemic thanks to Government support, must now deal with a financial reality check as higher interest rates hit working capital for the foreseeable future.

“Taken together with stubbornly high inflation and weak consumer confidence, many of these businesses will inevitably head towards failure. The construction industry, which has long been a bellwether for the health of the economy, looks particularly vulnerable with over 70,000 firms now in significant financial distress and circa 6,000 in much more serious critical financial distress – often a precursor to formal insolvency.” 

She added: “These businesses must now struggle through a period of inflation-eroded margins, weak demand and a looming recession. It is likely to be an insurmountable task for many. This latest data highlights how the debt storm, which has been brewing for years, but had been held off by several measures to provide breathing space for companies, may very well break. Something that will send shockwaves through the whole economy.” 

Ric Traynor, executive chairman of Begbies Traynor, said: “I am hopeful that stabilising inflation and interest rates will start to slow the rising levels of distress in the economy in due course, but history dictates that this will take some time and insolvencies often peak long after a recovery has started. Unfortunately for many businesses, time is not on their side.

“The ongoing geo-political uncertainty, which is particularly affecting commodity and energy prices, coupled with high interest rates, weak consumer demand, sticky levels of inflation and an anticipated recession over the coming year, may simply prove too much for many of these distressed businesses.”

He added: “So, given the challenges the economy still faces, the outlook remains pretty bleak, and I expect many more ‘zombie’ companies to continue to fail for some time to come as the impact of this economic backdrop makes them increasingly unviable.”