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The Business Distress Index Q3 2020

Written by: Keith Tully

Coronavirus crisis holds 544,000 SMEs in distress endangering 1.8 million jobs

  • 18% increase in start-ups in significant financial distress in the last quarter
  • 544,000 SMEs in significant financial distress – 42,000 increase during lockdown (8% from Q1 2020 – Q3 2020)
  • 27% increase in transport and logistics start-up businesses in distress in the last quarter affected by events, retail, construction and wholesale businesses being hit hard by the pandemic
  • Lockdown period pushes 53% transport and logistics businesses and 34% more bars and restaurants into significant distress
  • SMEs in significant financial distress employ 1.8 million people

The latest Business Distress Index from RealBusinessRescue.co.uk has revealed the number of SMEs in significant distress* now stands at 544,000, putting 1.8 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 and discovered that since lockdown 42,000 more SMEs have been plunged into distress – an 8% increase since Q1 2020. In the last quarter alone, there has been an increase of 6%, or 25,000 businesses in distress.

In addition to this, RealBusinessRescue.co.uk discovered that the number of start-up businesses (born after 2017) in significant distress had also soared by 18% in the last quarter due to the pandemic. There are now 108,000 of these fledgling businesses in distress – a 39% increase since the start of lockdown when there were 78,000 businesses in distress.

These rapid increases in distress for such small and young companies is worrying when considering that the number of insolvencies in 2019 was just 17,196.

Transport SMEs hard hit by coronavirus

Of the 544,000 SMEs in distress, the RealBusinessRescue.co.uk analysis reveals the industrial transportation and logistics sector (covering transport of all goods across air, land and sea) saw the biggest increase in troubled companies with a 14% leap from 11,909 at the end of Q1 2020 to 13,528 at the end of Q3 2020. The food and drug sector was close behind with a 12% increase from 12,951 in Q1 2020 to 14,444 in Q3 2020.

However, when it comes to job protection these two sectors are not the most concerning. There are 344,000 jobs held by the 86,000 support services businesses in distress and 271,000 people employed by 32,000 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 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 seven jobs.

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

"These latest results demonstrate that while some bigger companies are finding their feet in this recession it is the smaller companies that are suffering the biggest impact. With the pandemic having pushed more than 40,000 into financial distress, the backbone of the UK’s economy is suffering and we could soon have a dangerously top-heavy economy. To put that figure of 40,000 more distressed businesses into context, there were just over 17,000 corporate insolvencies in 2019 as a whole.”

“The role of these smaller companies is key, not only as key suppliers with a vast array of important innovations, but as employers to millions of talented people that will be vital to funding the economic recovery after the world has either adjusted to, or found a solution to coronavirus.

“We have seen a significant number of transport businesses getting in touch with us, as well as events companies and IT companies. While the headlines have not focussed on these areas they are certainly suffering. The headlines read that jobs are being created in logistics with goliaths in the sector such as Amazon or as delivery drivers for supermarkets, but this doesn’t tell the full story. The retailers, events companies, wholesalers and construction firms that the smaller transport companies rely on for their living are barely working at the moment. In fact, events companies, which exist on forward planning, are unable to move in this climate because no one is able to predict what is happening next week, let alone next year.

“It is for this reason that small businesses, which have little or no cash reserves, need to get ahead of the game by considering restructuring action now so that when the creditors come calling they are in a good space. We can offer help on RealBusinessRescue.co.uk or on the phone to talk through the options such as CVAs, administration, or Fast Track CVAs for companies that were in a good profitable position before the pandemic. Alternatively, there is a good market for investors and buyouts. The only thing that business owners have to be wary about is that these investors are looking for a good deal in a down market. It’s an option for an exit, and it could be a good one, but expectations will have to be lower than before the pandemic.”

Fledgling transport start-ups failing to fly

According to the insight, the number of fledgling businesses (born in 2017 or later) in significant distress in the industrial transport and logistics industry (transporting goods by land, air and sea) increased by 27% (Q2 2020 2,305 to Q3 2020 2,925) with a 22% increase for the construction sector (Q2 2020 10,302 to Q3 2020 12,617) and telecommunications and IT sector (Q2 2020 4,519 to Q3 2020 5,454).

These increases are even more significant since the start of lockdown. There are now 53% more transport and logistics start-ups in distress than at the end of March, and 47% more construction start-ups in distress since the start of lockdown. Surprisingly, the number of start-ups in the bar and restaurant sector in significant distress has only increased by 35% - this is thought to be due to financial aid from government.

These large increases are also seen in the regions with 25% more Northern Ireland start-ups falling into significant distress in the last quarter (Q2 2020 1,141 to Q3 2020 1,425). There was a 20% increase for fledgling businesses in the north east (Q2 2020 5,610 to Q3 2020 6,754) and 19% for those in London (Q2 2020 24,003 to Q3 2020 28,567).

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 correctly. 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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