As many as 23,500 British companies may go bankrupt this year, as a direct result of government spending cuts, and almost 150,000 firms are in serious financial trouble, warned Begbies Traynor Group, the insolvency specialist.
Research from Begbies noted that the number of UK companies with significant financial woes has climbed year-on-year for the first time since the start of 2009.
The firm reported that 147,836 companies sank into financial trouble in the final quarter of 2010, 4 percent higher than the year-ago quarter, and 20 percent higher than the third quarter.
As a result, Begbies estimates that about 23,500 UK companies could file for bankruptcy this year, up from 21,500 in 2010, with smaller businesses suffering the worst impact.
Begbies latest report shows that at present 3,018 companies are now in the critical category, owing a total of almost 53-billion pounds sterling to creditors, suppliers and service providers.
While the amount owed was lower than the third quarter of 2010, the number of companies in trouble had increased by 3 percent, suggesting that more small businesses were suffering financial problems.
“It is likely that many of these ‘problem’ businesses will reach informal arrangements with creditors or will be proactively managed by the banks and restructuring experts outside of formal insolvency,” the firm stated.
“However, given historical experience, these higher levels of distress would typically be expected to translate into a 10 percent or greater rise in formal insolvencies in 2011 (compared to an estimated 15 percent decline in 2010), due to hardening creditor attitudes, the impact of public sector cuts and the gradual unwinding of government support measures. This could mean a rise from c.21,500 insolvencies in 2010 to more than 23,500 in 2011.”
Ric Traynor, executive chairman of Begbies Traynor, said: “today’s figures show that UK businesses are demonstrating real signs of distress and that trade creditors are both losing patience with their debtors and in need of collecting cash into their own businesses. These figures show the first evidence of a hardening of creditor attitudes and the real strain being felt by UK companies at this point in the cycle.”
Traynor further warned that these figures “demonstrate that the sectors most reliant on government spending are already feeling the impact of public sector cuts, confirming the financial effects of the recent contraction in the services and construction sectors. With the full implementation of budget cuts only starting to show through in these figures, public sector exposed sectors are likely to face significant increases in the level of corporate failures over the course of 2011. For smaller businesses, we are entering the darkest hour before the dawn; as they face the dual challenges of weak domestic demand and greater pressures from larger competitors and business customers looking to preserve their own profitability. As such, it will be smaller businesses that bear the brunt of an increase in formal insolvencies.”