Is There a Ticking Time Bomb of Business Insolvency in the UK?

Ticking time bomb of business insolvency

It’s a concerning time for businesses in the UK, with a whole host of factors coming into play, it may well be producing a ticking time bomb for those who were already encountering trouble financially before this.

Rising costs seem to be the driving force behind many businesses’ concerns, but the conflict in Ukraine, Brexit and the slow recovery from COVID mean that there is a perfect storm coming.

The Federation of Small Businesses chairman, Martin McTague, recently made the ‘ticking time bomb’ comment, citing that more than half a million firms could go bust or become insolvent within weeks if nothing was done to address it.

He welcomed the chancellor Rishi Sunak’s latest support for consumers through the £15bn cost of living package, but also said some of those recipients could lose their jobs unless the government rolled out targeted measures for their employers.

Mr McTague also said that there was a real concern that a vast number of firms only had around three months of cash reserves left to fall back on.

Consumer price inflation hit 9% in April, the highest level since 1982. Costs have been driven higher by a jump in energy bills, record petrol prices and the rising cost of a weekly shop. The Bank of England has estimated inflation will peak at about 10% later this year.

£45bn was also spent on keeping firms afloat during COVID and Mr McTague said that this would essentially be a waste if businesses were then simply left to fall into insolvency because of energy costs or increases in expenses.

So what are the causes?

Data from the ONS has backed up this warning, showing that these are the main reasons why there is such a huge concern:

Inflation:
Businesses reported input price inflation as the main concern for their business for May 2022 at 26%, up from 24% in April 2022, and energy prices at 20%, compared with 21% in April 2022.

Insolvency:
In April 2022, 22% of businesses not permanently stopped trading with 10 or more employees experienced global supply chain disruption; this was up from 20% in March 2022.

Recruitment:
In early May 2022, 13% of businesses reported a shortage of workers, a slight decrease from the 14% reported in early April 2022; the accommodation and food service activities industry continued to report the highest proportion of businesses experiencing worker shortages, at 34%.

Import and Export:
In April 2022, 64% of businesses currently trading with 10 or more employees reported experiencing a challenge while importing and 59% reported a challenge while exporting, with both figures representing a fall from March 2022; the biggest fall was seen in businesses reporting additional paperwork as an exporting challenge.

Cost of Living Crisis:
Although not direct, increasing energy prices for consumers and businesses alike mean there is less demand for products and services overall. This is affecting businesses in general as people tighten their belts as they would normally in a recession.

What now?

Overall, measures need to be taken to address the whole picture, so-called ‘zombie’ companies that would have been propped up by the Government support offered during COVID-19 that would have failed before the pandemic will likely have already gone insolvent or are about to, but legitimate businesses across the UK will likely suffer needlessly if the situation continues.

Are you in this situation?

For more information on ways to improve your situation, get in touch with us today via [email protected] or by calling 0800 9750 380.