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The Business Distress Index Q2 2020

Written by: Keith Tully

Coronavirus crisis holds 520,000 SMEs in distress endangering 1.7 million jobs

  • The Business Distress Index18% increase in start-ups in significant financial distress in the last quarter
  • 520,000 SMEs in significant financial distress – 16,000 increase in during lockdown (3%)
  • SMEs in significant financial distress employ 1.7 million people
  • Wales sees the largest percentage increase for young businesses in distress (20%)
  • 21% increase in Industrial Transport and Logistics, Telecoms & IT and Travel & Tourism businesses in distress in the last quarter

The latest RealBusinessesRescue.co.uk Red Flag Alert data analysis for small and young businesses has revealed the number of SMEs in significant distress* now stands at 520,000, putting 1.7 million jobs under threat.

The website RealBusinessRescue.co.uk, set up by Begbies Traynor to advise business leaders in financial distress, analysed data from Red Flag Alert discovering that coronavirus has plunged 16,000 more SMEs into distress in the last quarter alone – a 3% increase on the previous quarter.

In addition to this, RealBusinessRescue.co.uk discovered that the number of start-up businesses (born after 2017) in significant distress had also soared in the last quarter due to coronavirus. There are now 92,000 of these fledgling businesses in distress – an 18% (14,000) increase on the previous quarter when the total of businesses stood 78,000.

Food and Drug SMEs hard hit by coronavirus

Of all the 520,000 SMEs in distress, the RealBusinessRescue.co.uk analysis reveals the food and drug sector saw the biggest increase in troubled companies with a 6% leap from 12,951 in Q1 2020 to 13,741 in Q2 2020. Industrial transportation and logistics businesses were close behind with a 5% increase (Q1 2020 11,909 to Q2 2020 12,476).

However, when it comes to job protection these two sectors are not the most concerning. There are 324,000 jobs held by the 81,000 support services businesses in distress and 271,000 people employed by 30,000 troubled health and education businesses.

The research also found that rescuing SMEs in the hotel and accommodation sector could be the most beneficial for jobs. For every one business in distress saved in this sector, the UK could protect 10 jobs. For at-risk SMEs in health and education this equates to nine jobs, printing and packaging eight jobs and manufacturing six jobs.

Shaun Barton, National Online Business Operations Director at RealBusinessRescue.co.uk, said:

"The hopes of a V-shaped recovery might be fading after the latest economic growth figures and the findings from our analysis demonstrate that SMEs have been hardest hit by the pandemic with 16,000 pushed into distress. Increasingly, SMEs across sectors are calling us up to ask for advice on which avenues they can take to save their businesses. We look at these figures and see that the government has good cause to save them."

"There are 1.7 million jobs at stake within these troubled companies and the pay-off from saving businesses one at a time is huge. For the directors of these businesses, they know that it's not just their company at risk. It is the livelihoods of their workers. Over the past few months many will have had sleepless nights worrying about their employees. It is at this point that they pick up the phone and talk to us, but they should feel free to talk before then and resolve issues before they grow."

"In these coming months, we expect that there will be more fallout, but we have to do all we can to help those businesses already in distress. CVAs, searching for investment or financial aid will become more normal as the months go on. Small businesses can get through this if they are presented with the correct avenues to take and we look forward to helping them through our specially set up helpline on RealBusinessRescue.co.uk."

Fledgling telecommunications and tourism businesses failing to fly

According to the insight, the number of fledgling businesses (born in 2017 or later) in significant distress in the travel and tourism industry increased by 21% (Q1 2020 372 to Q2 2020 578) with the same increase for the telecommunications and IT sector (Q1 2020 3,101 to Q2 2020 4,519) and industrial transport and logistics sector (Q1 2020 1,301 to Q2 2020 2,305).

These large increases are also seen in the regions with 20% more Welsh start-ups falling into significant distress in the last quarter (Q1 2020 1,633 to Q2 2020 2,805). There were similar 19% increases for fledgling businesses in the East of England (Q1 2020 3,586 to Q2 2020 6,289) and the Midlands (Q1 2020 6,359 to Q2 2020 11,341), although most concerning was the increase in economic powerhouse London (Q1 2020 14,020 to Q2 2020 24,003) which equates to 10,000 businesses.

Shaun Barton continues: "Fledgling businesses are also at risk and are most likely to have not had the experience of which direction to turn when finances become difficult. We are advising these businesses daily and would recommend that they find out all their options before making rash decisions. The UK is filled with talented entrepreneurs, the challenge now is to help them take the next step. If there are financial issues insolvency isn't always the only option. Even the biggest businesses restructure, it's just whether they do it right. The options are there, SMEs just have to take the leap."

‘Significant’ distress is those businesses with minor CCJs (of less than £5k) filed against them or which 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.

About Red Flag Alert

Red Flag Alert has been measuring and reporting corporate financial distress since 2004, and over that time has become an industry benchmark of the underlying health of companies across every sector and region of the UK. 

Through its unique algorithm, the Red Flag Alert measures corporate distress signals, drawing on factual legal and financial data from a wide range of relevant sources, including intelligence from the UK’s leading insolvency business, Begbies Traynor. Please note that the Red Flag Alert algorithm was refreshed in Q3 2017 to enhance the risk factors analysed in the data. The reported results have been backdated to ensure consistency of comparative data.

The release refers to the numbers of companies experiencing ‘Significant’ problems, which are those with minor CCJs (of less than £5k) filed against them or which have been identified by Red Flag’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 prepare them 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.

Notes to editors

Begbies Traynor Group plc is a leading business recovery, financial advisory and property services consultancy, providing services nationally from a comprehensive network of UK locations. The group has 735 staff and partners and the professional staff include licensed insolvency practitioners, accountants, chartered surveyors and lawyers.

The group’s services include:

Business recovery and financial advisory

Corporate and personal insolvency - we handle the largest number of corporate appointments in the UK, principally serving the mid-market and smaller companies.

Corporate finance - buy and sell side support on private company transactions.

Financial advisory - forensic accounting and investigations, debt advisory, business and financial restructuring, due diligence and transactional support.

Property advisory and transactional services

Valuations - valuation of property, businesses, machinery and business assets.

Property consultancy, management and planning - building consultancy, commercial property management, specialist insurance and vacant property risk management, transport planning and design.

Transactional services - sale of property, machinery and other business assets through physical and online auctions; business sales agency; commercial property agency focussed on northern and eastern England.

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

Keith Tully

Author
Keith Tully
Partner

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Keith has been involved in Business Rescue since 1992, during which time he’s worked for both independent and national firms. His specialties include company restructuring matters and negotiating with HMRC on his clients behalf.

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