The Business Distress Index Q2 2025

How many SMEs are in financial distress?

British businesses are operating under volatile conditions as economic pressures erode profit margins and restrict company cash flow. The start of Q2 2025 marked the beginning of the new financial year, which is synonymous with tax rises. As operating costs rise across the board, such as Employers’ National Insurance Contributions and National Living Wage, business owners must find a way to balance rising costs or risk the threat of insolvency.

The Business Distress Index published by Real Business Rescue uses data from Companies House and Red Flag Alert to measure financial distress levels across the small-to-medium business population in the UK. We look at company insolvency statistics for UK SMEs, including a detailed regional and sector breakdown.

Analysing UK business distress statistics

A gloomy climate of rising taxes, volatile consumer spending, and global economic instability shadows the ailing British economy. As large businesses scale back operations and tighten spending to offset rising costs, smaller businesses with limited reserves and minimal flexibility contend with a high risk of insolvency.

The Business Distress Index shows the intense trading pressure encountered by businesses in Q2 2025, as nearly 50,000 businesses were in ‘critical financial distress’. This refers to businesses at severe risk of insolvency due to deteriorating working capital, retained profits, and net worth.

In Q2 2025, critical financial distress jumped by 21.4% year-on-year to 49,309 businesses, compared to 40,613 businesses in Q2 2024. When compared to the prior quarter (Q1 2025: 45,416), critical financial distress increased by 8.6%.  

In Q2 2025, significant financial distress rose by 10.8% year-on-year to 666,876 businesses, compared to 601,950 businesses in Q2 2024. When compared to the prior quarter (Q1 2025: 579,276), critical financial distress increased by 15.2%. 

Analysing UK sectors in financial distress

As part of the Business Distress Index, key trends across 22 bellwether sectors are analysed. Out of the 22 sectors under the spotlight, all sectors experienced a year-on-year increase in critical financial distress levels over the last year.

The sector under the most extreme financial strain was Bars and Restaurants (+41.7%), followed closely by Travel and Tourism (+39.0%) and General Retailers (+17.8%). Consumer-facing industries continue to be hard-hit by low consumer demand as household spending remains tight due to high inflation, rising energy prices, and the ongoing cost of living crisis.

Out of the 22 sectors analysed, six sectors saw a year-on-year drop in significant financial distress, including Printing and Packaging (23.5%), Manufacturing (11.6%) and Industrial Transportation and Logistics (10.1%).

Shaun Barton, National Online Operations Director at Real Business Rescue, said:

“Although the economy was moving in a positive direction in the first quarter, progress has backtracked as tax rises came into play in April. With limited options available for businesses but to absorb high employee costs amid an economic crisis, the financial burden grows heavy on SMEs.

“Consumer confidence continues to decline as inflation remains high, which pushes up the price of energy and food, and subsequently stifles consumer demand. Consumer-facing industries are the hardest hit as consumers rein in non-essential spending to remain afloat. As businesses see profits decline, they must seek urgent restructuring to withstand financial pressures and remain financially viable.”

UK regional business distress statistics

The region with the highest concentration of companies in significant financial distress in Q2 2025 was London, as it houses the highest population of UK SMEs. This equates to 197,975 businesses in this category, compared to 169,442 in Q2 2024, a 7% year-on-year change. The South East, and then the Midlands were next in line.

A snapshot of the financial health of UK businesses

The second quarter was a momentous chapter for UK businesses as the tax burden increased for most businesses, while they absorbed the impact of US tariffs. With nearly 50,000 beleaguered businesses at the tipping point, lifelines must be sought to prevent mass insolvencies.  

Need company debt help?

If your company is experiencing cash flow problems due to rising operating costs or low profits, seek professional advice to prevent the financial position of your company from worsening. The Real Business Rescue team supports thousands of distressed directors every year with a range of problems, from creditor pressure, company debts, to overdue HMRC tax.

We offer a free and confidential consultation to help establish your financial position and explain the options available, such as business restructuring or company liquidation. For urgent advice on how to navigate a company in financial distress, call our free director helpline or take our 60-second test to understand your next steps.