Category: Funding

Over Half a Million UK Companies in Significant Financial Distress

According to redflagalert, a report has suggested thats:

  • 509,000 UK companies are in significant financial distress—the highest number ever measured.
  • The coronavirus lockdown has seen the largest quarterly increase in the number of businesses in significant distress since the end of 2017, growing by 15,000 companies.
  •  This figure is expected to increase throughout Q2 as COVID-19 restrictions continue.
  • The number of critically distressed businesses increased by 10% in the last quarter alone.

During Q1 2020, the number of UK companies experiencing significant financial distress exceeded the half a million mark for the first time since our research began.

Latest figures show a 3% quarterly increase in the number of companies that are unable to meet their debts—that’s 15,000 businesses, representing the largest increase since the end of 2017.

The leading cause of this is the coronavirus restrictions and our data shows that SMEs have been worst hit, representing over 99% of all businesses in distress.

Companies with less than 250 employees are particularly vulnerable at this time as many have struggled to access government support schemes.

Even more concerning is that our data shows a 10% jump in the number of businesses in critical distress in the last quarter—this is usually a precursor to insolvency.

A recent survey from redflaghalert has suggest that there has been a significant increase in businesses experiencing critical distress; 2,289 companies are now in this category. Between Q4 2019 and Q1 2020, the increases in certain sectors have been dramatic:

  • Bars and restaurants: +37%
  • Real estate and property: +21%
  • Construction: +11%
  • Retail: +8%
  • Manufacturing: +8%

The sectors that have been hardest hit by significant financial distress in the last quarter are:

  • Real estate and property: +6%
  • Hotels and accommodation: +5%
  • Construction: +4%
  • Health and education: +4%

Since 2014, several sectors have had huge increases in the number of businesses in distress. These sectors include:

  • Utilities: +132%
  • Real estate and property services: +104%
  • Sport and health clubs: +86%

Year-on-year, all but one (printing and packaging) of the 22 sectors monitored by Red Flag Alert have seen increases in the number of companies in significant distress over the past 12 months, with the worst affected being:

  • Real estate and property: +17%
  • Sport and health: +8%
  • Food and beverage: +7%

Many businesses are currently not failing immediately because the government support schemes. The suspension of court action has stopped many businesses from also going under. However, this will only be a short-term solution and once things start to normalise again the figures may increase.

Typically, it would be expected that 4.3% of these companies will fail each year not because of coronavirus restrictions, but because they were already at high risk of failure from any short-term drop in revenue and cash flow. However, the impact of COVID-19 will see this figure double and leave the UK economy with insolvent debts totalling £8.6bn this year.

Why Is The Machine Finance Market Growing?

Machines are critical to growth in the manufacturing sector but they are often expensive and can eat into business profits without some form of financial help.

Traditionally business owners turn to the bank to provide straightforward business loans to help if there is insufficient cash in the business to purchase machines. Even if there is enough cash to buy a machine, a loan can be a more sensible way to buy equipment particularly if there is risk attached in making large investments as there often is in business. However, business loans from banks also come at a cost and interest rates can be high.

Having multiple loans can also leave a business vulnerable in a downturn and restrict any cash flow available to grow the business. Machine finance is growing in popularity because it unlocks funding when you need it.

So if your business requires a new machine that will cut down the amount of manual labour required to get jobs done such as a CNC machine, machine finance can help you acquire that machinery at a minimum upfront cost.

This means you get the benefit of improved efficiency and profitability while spreading the cost. It can also be tax efficient now that the government has increased the annual investment allowance. So it comes as no surprise that the machine finance sector has grown 9% year on year.

Some SMEs Remain Cautious on Seeking Funding

While the asset finance sector continues to grow as a source of funding for SMEs, businesses remain hesitant to take advantage of this and other funding options stifling their ability to grow.

This conclusion was drawn after one survey found that more than a third of SME business owners look to avoid borrowing money at any cost.

Asset finance for new business grew six percent year on year in the month of July in deals of up to 20 million. Overall, however, new business fell when higher value deals were taken into account indicating the reluctance to borrow mainly affects the owners of businesses in need of higher than average levels of funding.

The figures released by the Finance & Leasing Association (FLA) did report a more positive trend on the plant and machinery sector with new business rising 20% year on year in the month of July.

The findings show that asset finance remains a vital part of the funding needed to support businesses and in turn the UK economy. The British Chamber of Commerce this month painted a gloomy picture of the UK’s economic prospects Vs the Eurozone.

This only increases the importance of the contribution made by the asset finance industry to future prosperity following Brexit.