UK companies in financial distress rise at fastest pace in 7 years

The number of companies in significant financial distress has risen at the fastest rate in more than seven years, sparking warnings that “the dam of zombie businesses could be about to break” when government Covid-19 support comes to an end in the summer.

Almost 100,000 more businesses were found to be significantly distressed in the first three months of the year compared with the previous quarter, despite the ban on winding-up petitions linked to Covid-related debts.

More than 720,000 businesses are now in significant financial distress, according to data from insolvency company Begbies Traynor, which said the 15 per cent rise from the previous quarter was the largest increase since its research began in 2014.

Begbies Traynor found that companies in financial difficulty spanned all 22 sectors analysed by its research, highlighting a broad and deteriorating financial situation as the UK starts to exit from the economic lockdown. 

It defines significant distress as businesses with minor county court judgments filed against them or which have a sustained or marked deterioration in key financial ratios and indicators such as working capital, profits and net worth.

Bankers and insolvency practitioners warn that the UK is facing widespread business failures when the government winds down its Covid-19 support packages. The first cliff edge is expected at the end of June when landlords will be able to demand repayment of more than a year’s worth of rent from struggling tenants. 

Business leaders warn some retailers and restaurants that have yet to see a significant improvement in trading could be forced to hand back the keys to properties unless landlords allow them flexibility over repayments.

The furlough scheme, which has helped keep staff employed and businesses in operation, will end in the autumn, leading to further financial demands on companies.

Many have only just been able to stay afloat given government support, and will struggle to invest or grow given the likelihood of post-pandemic debts, leading to the term “zombie” companies. The government has stopped its Covid-19 loan programme, with banks now asking for interest on loans handed out this time last year.

“The dam of zombie businesses could be about to break,” said Julie Palmer, partner at Begbies Traynor. “Unmanageable levels of debts and subsequent overtrading are likely to be the hidden icebergs waiting to sink even the highest profile businesses.”

The transportation and logistics sector was one of the worst affected in the first three months of the year, with almost a quarter more companies in significant financial distress as trading difficulties caused by Brexit hit smaller operators.

On a regional basis, London was one of the worst hit owing to a larger number of businesses in leisure and hospitality that have been forced to close because of the pandemic. 

Ric Traynor, executive chair of Begbies Traynor, said: “Despite the unprecedented central government support offered to UK businesses, it is now clear that many companies are struggling under the weight of increased debt combined with poor revenue streams.”