Expert Comments On Latest R3 Figures

Levels of business distress continue to be higher in the North, according to the third wave of insolvency trade body R3’s Business Distress Index.  Signs of distress revealed by the research include 31 per cent of Northern businesses introducing pay cuts, compared with just 16 per cent in the Midlands and 20 per cent in the South.

Regional differences were also marked in the extent of cash flow difficulties with 31 per cent of companies in the North experiencing problems, while only 19 per cent in the Midlands and 22 per cent in the South reported difficulties.  In addition, 24 per cent in the North used a maximum overdraft facility (13 per cent in the Midlands and 14 per cent in the South) and loss of regular customers (26 per cent compared with 15 per cent in the rest of the country).

The research also showed that across the UK, one in four (24 per cent) businesses are concerned about their debts and for those businesses that are concerned, their worry has intensified during the last quarter, with small businesses being particularly vulnerable.

The most significant increase is concern over bank loans and other finance debt. Forty-three per cent of businesses concerned about their debts are now worried about these types of debt; this compares to just 24 per cent in September 2010 – an increase of 19 per cent. It points to an escalation of financial difficulties among those who have been struggling for a number of quarters. Overall, finance and bank loans remain the type of debt businesses are most concerned about.

Andrew Walker, chair of R3 in Yorkshire and partner at Irwin Mitchell, comments: “An alarming minority of the business community, particularly in the North, are struggling to address their financial woes. If these distressed businesses continue along this downward trend they may lose control of their mounting debt, which will push them into insolvency in the coming quarter.

“These businesses are allowing their debts to manifest instead of being able to pay them off; things aren’t improving for these businesses which are of real concern at a time when monetary and fiscal policy should be benefitting businesses. These businesses are likely to fall on hard times when interest rates inevitably rise, making it more difficult to service their debt.”

The research reveals it is small businesses which express most concern about their debts, across all debt types. Nearly half (46 per cent) of small businesses are now worried about bank loans and other finance debt, compared to 34 per cent last quarter. Thirty-eight per cent of small businesses are now worried about debt owed to trade creditors - a jump of 14 per cent from the previous quarter. Concern about crown debts has also risen, at 41 per cent - a 5 per cent rise from the previous quarter.

The distressed signs small businesses are experiencing are mostly tied to cash flow. A quarter explicitly state they’re having cash flow difficulties (25 per cent); one fifth (19 per cent) are struggling to pay invoices on time; 17 per cent are using their maximum overdraft facility and 6 per cent have sold assets to maintain cash flow. Small businesses are likely to have a much smaller ‘buffer zone’ compared to large and medium businesses, and therefore cash flow problems can escalate quickly with damaging consequences.

Walker said: “Cash flow difficulties are particularly severe in the North and these, coupled with debt concern, paint a worrying picture for small businesses. Results from the barometer in December 2010 revealed high levels of distress and debt concern. We assume this is due to the adverse weather conditions and expected businesses to have a bleak outlook during those difficult trading conditions. The fact that some of those results have been compounded or increased this quarter is alarming. Businesses haven’t just hit a bump in the road but have sustained financial problems. These could be ‘zombie’ businesses that are unviable; when changes to monetary and fiscal policy become less favourable they are likely to go insolvent.

“Despite the worrying minority, the report reveals signs of distress on the whole have decreased this quarter, which is extremely positive for the majority of businesses who seem to be bouncing back from the recession.”