Coronavirus pushes financially distressed companies in the UK over the half-million mark

• Number of businesses in significant distress stands at 509,000 – the highest number measured by the Red Flag Alert research
• Impact of coronavirus lockdown sees the largest quarterly increase since the end of 2017 – 15,000 more businesses in significant distress (3%) since Q4 2019
• Record figure likely to be the tip of the iceberg, as full Covid 19 impact will build through Q2
• Number of critically distressed companies jumps 10% in the last quarter

The latest Red Flag Alert data for Q1 2020 found there were large numbers of UK businesses experiencing significant financial distress at the end of March 2020, with the overall figure now exceeding half a million for the first time.

New research from Begbies Traynor Group, the UK’s leading independent insolvency and advisory firm, finds the largest quarterly increase in the number of businesses in significant financial distress since the end of 2017 to 509,000 – the highest number recorded by this research.

In just three months, factors including the coronavirus pandemic has pushed more than 15,000 businesses into significant distress with the data showing that SMEs have been chiefly affected. Of the 509,000 in distress, 504,000 are businesses with under 250 employees highlighting the vulnerability of smaller businesses. Although the Government has introduced support measures, including the Coronavirus Business Interruption Loan Scheme (CBILS), some firms have struggled to gain access to the government-backed loans.

Of even greater concern is the increase of businesses in critical distress – usually a precursor to insolvency – with a 10% increase in the past quarter alone. This figure would have been even higher, but creditors have been held back from taking court action due to the lockdown. There are now 2,289 businesses in critical distress with the most notable increases in the past quarter a 37% increase in bars and restaurants (Q4 2019, 87 to Q1 2020, 119), 21% increase in real estate and property (Q4 2019, 128 to Q1 2020, 155), 11% increase in construction (Q4 2019, 509 to Q1 2020, 563) and 8% increase in both general retail (Q4 2019, 116 to Q1 2020, 125) and manufacturing (Q4 2019, 124 to Q1 2020, 134).

Julie Palmer, Partner at Begbies Traynor, said:

“The coronavirus pandemic is a true ‘black swan’ event that has decimated short term business financial performance. Although it is still early days and with no end to the lockdown in sight things could get much worse, with the Red Flag research highlighting landmark levels of financial distress already.

“With many SME’s yet to access government funding such as CBILS, many will simply run out of cash, particularly with the April pay run approaching and payment for furloughed staff still outstanding. The Red Flag research demonstrates that many businesses were being cut close to the root before this crisis started to affect the economy and may be left with little option but to cut their losses with the knowledge that they would never be able to pay back a loan, no matter what the terms.

“While the loss of a business is devastating, UK business owners are talented entrepreneurs and after coronavirus will find opportunities. At this moment, we just have to anticipate what those opportunities are."

Sectors in distress hit hard since 2014

A look back at recorded data since 2014 demonstrates a huge increase for certain sectors. Those sectors which have seen the largest increases in significant distress are utilities (132% Q1 2014, 1,472 to Q1 2020, 3,409 companies), real estate and property services (104% from Q1 2014, 27,658 to Q1 2020, 56,421) and sport and health clubs (86% Q1 2014, 5,124 to Q1 2020, 9,553).

Year-on-year, all but one (printing and packaging) of the 22 sectors monitored by the Red Flag Alert research have seen increases in the number of companies in significant financial distress over the past twelve months. In total, almost 25,000 more businesses slipped into financial distress in the past 12 months, with real estate and property (17% increase from Q1 2019, 48,429 to Q1 2020, 56,421), sport and health (8% from Q1 2019, 8,844 to Q1 2020, 9,553) and food and beverage (7% from Q1 2019, 9,832 to Q1 2020, 10,499) sectors seeing the largest percentage increases.

The hardest hit during the last quarter have been real estate and property (6% increase Q4 2019, 53,159 to Q1 2020, 56,421), hotels and accommodation (5% increase Q4 2019, 5,654 to Q1 2020, 5,914), construction (4% increase Q4 2019, 63,153 to Q1 2020, 65,456) and health and education (4% increase Q4 2019, 28,544 to Q1 2020, 29,650).

Ric Traynor, Executive Chairman of Begbies Traynor Group plc, commented:

“We hope that the concerted effort made by the Treasury to stand behind UK businesses through its package of measures proves to be successful so that the business community and, ultimately the UK economy can withstand the huge pressures placed upon it during this time. The truth is that this crisis has hit all business owners by complete surprise. They weren’t ever expecting to face such a drop off in activity or footfall, and few can be prepared for such a cliff edge in revenue.

Those businesses with strong balance sheets and access to funding will be able to reorganise their operations and survive the financial shock of this pandemic, while others will unfortunately not have the resources to carry them through this emergency and the uncertainty to follow.

“This latest data from our Red Flag Alert research suggests that UK businesses continued to struggle as the economy slowed last year, and that is before the full effects of COVID-19.Consequently, we expect these numbers to be the “tip of the iceberg” and as the year progresses we expect to see the number of organisations falling into significant and critical financial distress and ultimately insolvency to materially increase. With finite resources to bail out companies, the government has difficult choices to make concerning which companies to save based on which have the strongest footing to thrive long-term. As with the collapse of Flybe and Thomas Cook, there are going to be tough decisions ahead which must be based on sound economic principals if the money is to be recovered.”