Soaring inflation stokes sharp rise in companies suffering critical financial distress

he extent of the economic threat posed to small businesses by the cost-of-living crisis and soaring inflation has been laid bare by the insolvency specialist Begbies Traynor just hours after the Bank of England’s stark warning of a long and deep recession.

The business recovery consultancy’s “Red Flag Alert” found that almost 2,000 companies were in critical financial distress by the end of the second quarter, a rise of by 37% year-on-year, as soaring inflation took a heavier toll, with its rate in the real economy far exceeding official figures.

There were also more than half a million companies in significant financial distress. Higher wage demands from workers coinciding with faltering business and consumer confidence leave companies with “an exceptionally difficult economic backdrop,” Begbies said, while The repayment of government-backed Covid support loans are adding to the problem.

“Having emerged from the pandemic, many companies were hoping for an economic boom but that has simply fizzled out, as supply chain issues and the invasion of Ukraine have taken their toll by driving up raw material and energy costs and reducing both business and consumer confidence,” said Julie Palmer, partner at Begbies

“I am particularly concerned for those small businesses who operate in energy-intensive sectors, such as manufacturing, as some could simply become unviable. Without the benefit of an energy price cap, business energy tariffs have at least trebled, and for many it will be much worse.”

The Red Flag system looks at data on County Court Judgements on debt rulings made against firms, which often provide an early warning of insolvency. There were over 46,000 rulings in the first six months of 2022, up 5% on the first quarter driven in part by backlogs relating to Covid lockdowns. Over the whole of 2021, there were just over 59,000.

The sectors with the most critically distressed businesses – defined as County Court Judgements filed of more than £5,000 – are Construction, Support Services and Real Estate. The list is broad, also covering General Retailers, Automotive and Bars & Restaurants. The Red Flag Alert has been published by Begbies since 2004.

Meanwhile, Andrew Bailey, the governor of the Bank of England has rejected criticism that it started raising interest rates too late. He told BBC Radio Four’s Today programme “If you go back two years… given the situation we were facing at that point in the context of Covid, in the context of the labour market, the idea that we would have tightened monetary policy …  I don’t remember there were many people saying that.”