50% of Companies in ‘Critical’ Financial Distress

In addition, construction was the sector with the most companies in “critical” financial distress, hitting 6,141 in the first quarter of this year.

Overall, the level of “significant” financial distress leapt 30.8% year-on-year in Q1 2024 with 554,554 companies affected (Q1 2023: 424,041).

The construction, food and drug retailers and general retailer sectors in particular drove the increase in “significant” financial distress.

With many companies in “critical” financial distress expected to enter insolvency over the course of the next 12 months, the picture in the construction, real estate, financial services and support services sectors is particularly concerning as nearly 50% (c.20,000 businesses) of the companies in “critical” financial distress are represented by these sectors.

Julie Palmer, partner at Begbies Traynor, said:

“Despite some optimism as we entered the new year, 2024 has so far been characterised by a continuation of the same pressures that plagued companies in the UK throughout 2023.

“Since the pandemic, hundreds of thousands of UK businesses depleted their financial reserves and loaded their balance sheets with increasingly unaffordable debt which for many may simply be too great to bear.

“As with the prior quarter, the picture is particularly concerning in the consumer facing sectors.

“We are starting to see this translate into larger companies entering insolvency, a trend that I expect to continue while consumer confidence remains uncertain.

“On top of that, the higher levels of financial distress in bellwether sectors such as real estate and construction point to a troubled UK economy.

“Right now, many companies will be pinning their hopes on a meaningful cut to interest rates later this year, but the Bank of England continues to be hawkish, so it is unlikely to make a cut in the near-term given inflation is still higher than expected.

“All of this means that these pressures are here to stay, and I fear this will result in thousands of businesses failing in the coming months as the constant pressures will become too great for many.”

Source: Development Finance today