500,000 UK small businesses are in “significant financial distress” and a wave of insolvencies is looming.
This is according to restructuring experts Begbies Traynor, who have warned of “unprecedented” levels of financial distress amongst British firms seen in the last 12 months.
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Begbies Traynor has said that many small businesses have been lured into a false sense of security by continuing low interest rates, but that a storm of insolvencies is on the way as firms have overstretched themselves on credit.
According to the report, 448,011 businesses across the UK were in significant financial distress between July and September – an increase of 27 per cent on the same period in the previous year.
Firms are deemed to be in significant financial distress if they have received one or more minor county court judgements.
Impact of rate rises
There is growing concern that rate rises could tip many of these businesses over the edge. Last week the Bank of England’s Monetary Policy Committee increased the base rate by a quarter of a percentage point, the first such rise in a decade.
Begbies partner Julie Palmer said: “We are now starting to see the early churn. I think we will see more businesses go out of business. This feels like the calm before the storm.
“I always thought Brexit would cause a gradual increase in insolvencies, rather than an overnight effect, and we are now beginning to see that, both in insolvencies and companies in financial distress.”
Personal insolvencies on the rise
The number of personal insolvencies in the UK is also increasing rapidly. There were over 25,000 such insolvencies during the third quarter in England and Wales, more than 10 per cent higher than in the previous quarter.
This also represents a 7.7 per cent increase on the same period in 2016.
The Begbies Traynor report suggests that more than quarter of a million companies are in “zombie” status at the end of the quarter.
So-called ‘zombie companies’ are those whose income is just enough to service their debt, but not high enough to invest on top.
It is thought that low interest rates have encouraged the growth of zombie companies, which have been able to survive thanks to the low cost of servicing loans.
However, according to Palmer, those businesses are now at risk, adding: “We are now starting to see some of those businesses falling over.”
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