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Over 6,000 SMEs at Risk of Insolvency

Research from business software analysts Clarity suggests that just short of 6,500 businesses are at an increased risk of insolvency, which could affect the jobs of almost half a million people.

At BLB Advisory, we’re here to help companies that are struggling financially, but there are a number of extra factors at present that are affecting the survival of businesses, increasing the risk of them facing insolvency. These include:

  • Staff shortages caused mainly by the ongoing Covid pandemic
  • The end of the Covid support packages
  • Rising prices (themselves caused by a variety of factors), and especially the rising cost of fuel and energy
  • Higher taxes (in particular the return of the 20% vat rate, and the increase in NIC)
  • Interest rate hikes
  • The fallout from Brexit (which has caused interruptions in the supply chain and erratic delivery patterns)
  • The war in Ukraine (itself a supplier of many essential supplies to the UK, for instance sunflower oil)

In particular, companies which have been trading for 3 years or less are at an increased risk of insolvency. These companies have an estimated 4-25% higher likelihood of insolvency.

It is likely that insolvencies this calendar year will reach the same level as the pre-pandemic figures. In 2020 there were 12,500 businesses that failed according to the Insolvency Service statistics, rising to circa 14,000 in 2021. Notably the proportion of Creditors Voluntary Liquidations has risen steadily over this period and currently accounts for 90% of all corporate insolvencies, a jump of around 15% since 2020. So while the headline reporting talks about energy companies and Russian banks failing, it is in fact smaller organisations that are really feeling the aggregate effect of the factors mentioned above.

Despite the small decline in the recent unemployment figures it is expected that this will be a short lived blip, and that rising inflation and the tightening of the government’s monetary policy will reverse the trend. The Bank of England’s target for inflation (which admittedly was set months ago) at 2% cannot be met, and their revised figures suggest that the April figure will be nearer to 7%.

Many commentators have disagreed with the Bank’s prediction that this will be the peak figure and that the numbers will tumble over the coming months. However, this prediction was made without knowing of the ongoing war in the Ukraine and the subsequent effect this has had on oil prices and energy supplies. A number of commentators are suggesting that the inflation figure may go as high as 10%, and may take many months to return to a manageable figure.

The impact for businesses in the wake of all these factors is very difficult to predict, and clearly some industries will be much worse off.

The hospitality, tourism and leisure sectors have struggled to recover post lockdown and are still experiencing severe staff shortages, which in turn has driven up employment costs.

Automotive has seen a leap in demand, but with a severe issue with supply. Porsche has suspended production temporarily as it relied on wiring looms from Ukraine, and there is an ongoing issue with the supply of microchips for all vehicle manufacturers. As demand surges post lockdown for electric vehicles, this is severely affecting supply. Jaguar Land Rover has reported that a number of its vehicles are commanding a premium on the second hand market for instance.

Despite these challenging times, the most recent Bank of England Decision Makers Panel survey suggested that those surveyed felt that the majority of the effects of the pandemic would be over by the end of 2023, and the appetite for investment is currently very high.

In 2021 the expected high level of insolvencies didn’t materialise, and with hindsight we can say that this was mainly because of the various support packages brought in by the government. With these largely having ended (and indeed with businesses having to now repay the loans) will that picture stay the same?

The other interesting factor is that of regional variance. London, for instance, is lagging way behind according to the Clarity research, with a score of only 43 (under the heading Growth).

The good news – and hopefully that’s what it is – is that the Midlands leads the pack here with a score of 51.

Let’s hope this translates into more jobs and growth in the region.

If you have any concerns relating to the finance of your business, please don’t hesitate to get in touch. The earlier you seek advice, the more options you have for a resolution.