The number of businesses on the verge of bankruptcy has increased by a quarter over the last three months due to a “perfect storm” that includes higher interest rates, increasing costs and a downbeat consumer market.
According to Begbies Traynor’s corporate restructuring experts, in the fourth quarter of 2023 there will be 47,477 businesses in financial distress. This is a 25.9% increase over the previous three-month period.
The research indicates that levels of insolvency have increased across the UK over the last quarter. The number of construction businesses experiencing critical financial distress increased by 32.6%. Insolvency rates increased by 41,3% in the education and health sector and 24.7% in real estate.
Julie Palmer, partner of Begbies Traynor said: “After a challenging year for British business, which was characterised high interest rates and inflation, low consumer confidence, and rising and unpredictable costs, we now see this perfect storm impacting on every corner the economy.”
Begbies Traynor’s report shows the UK’s economy is absorbing the Bank of England’s aggressive rate increases at a faster pace. The UK’s central bank raised the UK base interest rate to 5.25 percent, a record high for the past 15 years. However, experts estimate that only a third has been passed on to businesses and households.
The Bank of England has tightened its cycle, but businesses have been affected more than households. The majority of household debt is mortgages. This is due to the increase in people who have taken out longer-term home loans after the 2008 financial crash.
The mortgage rates have steadily fallen since the third quarter 2023, as the financial markets priced in several rate reductions this year.
The Bank of England increased the base rate dramatically to curb inflation. It has dropped from a 41 year high of 11,1 per cent in October 20,22 to just 4 per cent, still twice the official target.
The UK economy has been impacted by the decline in demand, even though inflation is on a downward trend.
Since the 2008 Financial Crisis, UK interest rates have been kept at near-zero percent, which makes it relatively cheap for businesses to borrow money. The cost of servicing this debt has increased substantially over a short time period, increasing the risk that companies will struggle to generate enough revenues to meet their obligations.
Palmer said that now the cheap money era is over, the burden on businesses’ finances will be increased.
Insolvency risks are on the rise, and this could lead to a surge in redundancies in the next year. This would raise unemployment above its historic low of 4.2%. Separate statistics from the Office for National Statistics reveal that the number of workers who are at risk of redundancy has increased by 58% from 176.149 in 2022, to 278,149 the previous year.
Begbies Traynor reported that 539,900 UK companies were in “significant financial distress during the last three months of 2023. This is a 12.9% increase compared to third quarter.