More than 47,000 UK businesses start 2024 on the edge of collapse after critical financial distress jumps over 25% again

·    The levels of 'critical' financial distress jumped dramatically in Q4 2023, up 25.9% on the prior quarter (Q3 2023: 37,772), leaving more than 47,000 businesses near collapse in the UK at the start of 2024.

·    This represents the second consecutive period where critical financial distress has grown by around a quarter.

·    539,900 UK businesses are now in 'significant' financial distress, 12.9% higher than Q3 2023 and 5.6% higher yoy (Q4 2022: 511,093).

·    Every sector of the 22 covered by Red Flag Alert saw critical financial distress increase on the prior period, of the 22, 18 saw at least double-digit growth.

·    In Q4 2023, critical financial distress grew rapidly in the Construction (+32.6%), Health & Education (+41.3%), Real Estate & Property Services (+24.7%) and Support Services (+23.6%) sectors.

·    Serious concerns grow over the Construction and Real Estate sectors which still represent nearly 30% of all businesses in critical financial distress.

As we start 2024, the latest Begbies Traynor "Red Flag Alert" report, which has provided a snapshot of British corporate health for over 15 years, highlights the speed at which critical financial distress is growing in the UK after the second consecutive quarter of c.25% growth.

The rapid growth across every sector in the economy means 47,477 businesses are starting the new year in a precarious financial position. Historically, a significant percentage of the businesses identified by Red Flag Alert as being in critical financial distress will enter insolvency over the course of the next year.

Across every sector monitored by Red Flag Alert, the levels of critical financial distress grew quarter-on-quarter in Q4 2023, highlighting how the current economic backdrop is having a detrimental impact on every corner of the UK economy. The key sectors driving this increase continue to be the Construction, Real Estate & Property and Support Services sectors, up 32.6%, 24.7% and 23.6% respectively, alongside Health & Education (+41.3%).

This worrying picture for UK businesses can also be seen in the growing number of businesses in significant financial distress, up nearly 13% in Q4 2023 versus the prior quarter. As at 31 December 2023, well over half a million companies (539,900) were affected. The sectors driving this increase were Construction (+15.3%), Health & Education (+19.2%), Real Estate & Property Services (+21.3%) and Support Services (+9.1%).

Julie Palmer, Partner at Begbies Traynor, said: "After a difficult year for British businesses that was characterised by high interest rates, rampant inflation, weak consumer confidence and rising and unpredictable input costs, we are now seeing this perfect storm impacting every corner of the economy.

"Now that the era of cheap money is firmly a thing of the past, hundreds of thousands of businesses in the UK, who loaded up on affordable debt during those halcyon days, are now coming to terms with the added burden this will have on their finances.

"For some, a better-than-expected Christmas may kick these concerns down the road for a little longer, but the rapid growth in the levels of critical financial distress point to an economy that is waking up to the danger of debt ladened businesses in a higher rates environment.

"As we saw in the previous quarter, the strain being placed on companies has extended well beyond the consumer facing businesses with bellwether sectors, like construction and real estate, now in serious jeopardy as over 15,000 businesses face high risk of failure.

"Sadly, for tens of thousands of British businesses who should be looking ahead to 2024 with some degree of optimism, the new year will bring a fight for survival as the debt storm that has been brewing for years looks like it is breaking across the country."

Ric Traynor, Executive Chairman of Begbies Traynor, commented: "As we start the new year, the UK economy is in a difficult position after a challenging 12 months for British businesses who had to grapple with a number of unrelenting macro-economic pressures that made the lives of business leaders difficult.

"As a result, we are seeing insolvency rates starting to accelerate in the UK and our own empirical data highlights how this trend is likely to speed up in 2024 as the environment takes its toll on businesses.

"Later this year, we could see some respite for companies as inflation looks like it may reach more palatable levels which in turn should result in interest rates starting to climb down from current heightened levels.

"Unfortunately, there are no signs of an easy fix and, with geo-political uncertainty continuing to rise and a hike in the national wage around the corner, the backdrop is hardly improving for an economy that is still firmly in recovery mode post-pandemic.

"For many businesses, I fear soldiering on in this environment will prove to be one step too far and I expect thousands of debt-laden businesses to start to fail this year."

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Notes to Editors

About Red Flag Alert

Red Flag Alert has been measuring and reporting corporate financial distress since 2004. It has become a benchmark on the underlying health of companies across every sector and region of the UK.

Red Flag Alert's algorithm measures corporate distress signals, drawing on company accounts and factual, legal and financial data from a wide range of relevant sources, including intelligence from the UK's leading insolvency business, Begbies Traynor. The algorithm was refreshed in H1 2023 to enhance the risk factors analysed in the data. The reported results have been backdated to ensure the consistency of comparative data.

Algorithms which drive Red Flag Alert have been improved and updated for the latest report, with companies now measured against a new scorecard of indicators to give greater insight and accuracy into the health of businesses. Two years of work by data scientists analysing eight years of data, taking into consideration pre, during and post-pandemic insights to find signals and patterns indicating businesses in distress, combined with AI tools, means that Red Flag Alert aims soon to be able to predict how many companies in trouble will go on to fail.

The release refers to the number of companies experiencing "Significant" or "Critical" problems, which are those that have been identified by Red Flag Alert's proprietary credit risk scoring system which screens companies for a sustained or marked deterioration in key financial ratios and indicators including those measuring working capital, contingent liabilities, retained profits and net worth.

Red Flag Alert is commercially available to all businesses, on an annual subscription basis, to help them better understand risk and exposure and help subscribers to plan for the future. Further information about Red Flag Alert can be found at: www.redflagalert.com

Economically active businesses exclude those that are flagged by Companies House as being, Non-trading, Listed for Strike off / Strike off pending, Insolvent or Dissolved. Companies where there is insufficient information available for RFA to assign a health rating are also excluded.

About Begbies Traynor Group plc

Begbies Traynor Group plc is a leading professional services consultancy, providing services from a comprehensive network of UK and off-shore locations. Our professional team include licensed insolvency practitioners, accountants, chartered surveyors, bankers and lawyers. We provide the following services to our client base of corporates, financial institutions, the investment community and the professional community:

·      Insolvency

o  Corporate and personal insolvency

·      Financial advisory

o  Business and financial restructuring; debt advisory; forensic accounting and investigations

·      Transactional support

o  Corporate finance; business sales agency; property agency; auctions

·      Funding

o  Commercial finance broking; residential mortgage broking

·      Valuations

o  Commercial property, business and asset valuations

·      Projects and development support

o  Building consultancy; transport planning

·      Asset management and insurance

o  Commercial property management; insurance broking; vacant property risk management

Further information can be accessed via the group's website at www.begbies-traynorgroup.com