The number of companies in significant financial distress has leapt to 610,000, according to one of the UK's leading insolvency experts.
The latest Begbies Traynor Red Flag alert report, which has provided a snapshot of British corporate health for the past 15 years, paints a worrying picture for UK businesses as an increasing number are now falling victim to the exceptional economic pressures that continue to build in the economy.
About 15% of businesses are showing signs of stress as inflation increases costs and squeezes consumer spending.
Julie Palmer, the firm's regional managing partner, said company directors must now choose “whether to soldier on or give in” as businesses weakened by the pandemic now face up to the reality of a recession.
The total of companies said to be in significant financial distress represents an 8% increase year-on-year.
There also has been a 25% jump in the number of companies described as being under more serious stress, such as facing winding-up petitions.
“After several years of volatility, the directors of businesses up and down
the country are now facing very difficult decisions, Ms Palmer said.
"They must decide whether to soldier on or give in, as they realise their businesses may not be viable if interest rates continue to rise as
many economists expect.
“For the time being, many will continue to resist but interest rates will continue to rise, energy costs will remain stubbornly high, despite the Government’s intervention, and consumers are reining in spending, so the future is far from bright when we look into 2023.
“I fear that many directors who fought through Covid will soon conclude that getting through 2023 and 2024 is a bridge too far after the troublesome period they have just battled through.”
With the official rate of inflation in excess of 10%, and inflation in the ‘real economy’ likely exceeding this, businesses now face the very real prospect of interest rates climbing above 5%, a move that could force distressed businesses to enter insolvency as debt built up over the last decade and rapidly added to during the pandemic becomes unserviceable.
Begbies Traynor said many of these ‘zombie’ businesses, which benefitted from Government-backed Covid support loans, now face a series of risks ranging from soaring interest rates, to rising costs and declining demand, meaning that in many cases the growing challenges may prove too much.
Winding Up Petitions were 237% higher than the same period 2021, showing that companies are utilising aggressive legal enforcement measures to recoup debts.
Ric Traynor, executive chairman of Begbies Traynor, added: “This latest data clearly shows that many UK businesses are struggling as the macroeconomic backdrop continues to deteriorate.
“Unfortunately, things are only likely to get worse, especially while we have the conflict in Ukraine, an ever-strengthening dollar, and a lack of complete clarity on the UK’s fiscal plan.
"Inflation remains at levels not seen in 40 years and companies that have been burdened with high levels of debt are now seeing interest rates rise rapidly. For many, this will simply be too much.
“With consumer confidence where it is, it feels like we are heading towards a bleak winter and 2023 and, after two years of extensive financial support for businesses, the Government has little left in reserve to help businesses to ride out this economic storm.”