The final three months of 2023 saw a worrying jump in businesses facing a ‘critical’ level of financial distress, resulting in more than 47,000 companies now facing near collapse, according to new data.

Analysis by Begbies Traynor found that none of the 22 industry sectors it analysed are immune to the wave of financial pain. Meanwhile, there are serious concerns over bellwether sectors such as construction and real estate, between them representing nearly 30% of all businesses facing serious financial distress, insolvency and restructuring, the analysis revealed.

Julie Palmer, a partner at Begbies Traynor, says that over the past year companies have had to contend with high interest rates, rampant inflation, weak consumer confidence and rising and unpredictable input costs, which are now creating a perfect storm impacting every corner of the economy.

“Now that the era of cheap money is firmly a thing of the past, hundreds of thousands of businesses in the UK, which loaded up on affordable debt during those halcyon days, are now coming to terms with the added burden this will have on their finances,” Palmer says.

Historically, a large percentage of the businesses identified by Begbies Traynor’s analysis as being in urgent financial distress “will enter insolvency over the course of the next year”, the firm says.

The levels of critical financial distress jumped dramatically in the last three months of 2023, up 25.9% on the prior quarter. The sectors driving this increase continue to be construction, real estate and property services, support services, and health and education.

The research emphasises the speed at which critical financial distress is surging in the UK after the second consecutive quarter of around 25% growth. 

Palmer says that although some companies may have enjoyed “a better-than-expected Christmas”, the surge in the levels of critical financial distress “points to an economy that is waking up to the danger of debt-laden businesses in a higher-rates environment”.

Ric Traynor, Executive Chairman of Begbies Traynor, says that although the insolvency risk was “likely to speed up in 2024 as the environment takes its toll on businesses”, companies could see some respite later this year “as inflation looks like it may reach more palatable levels, which in turn should result in interest rates starting to climb down from current heightened levels”.

Nonetheless, Traynor warns there were “no signs of an easy fix” and, with geo-political uncertainty continuing to rise and a hike in the national wage around the corner, the backdrop was “hardly improving for an economy that is still firmly in recovery mode post-pandemic”.

He continues: “For many businesses, I fear soldiering on in this environment will prove to be one step too far and I expect thousands of debt-laden businesses to start to fail this year.”

Bob Pinder, ICAEW’s Director, Quality Assurance, says: “It’s been a difficult year for many businesses, culminating in consumer spending in the lead-up to Christmas not being what many businesses geared up for and hoped for.” 

Pinder highlights the importance for any businesses facing financial distress to seek early professional advice “to give the business not only the best chance of survival, but to position it for future growth”.