With the Government presently set to end its COVID-19 support schemes in the summer, worries are increasing over the health of many struggling businesses.
New figures – as reported by the Financial Times – indicate that the number of UK companies in significant financial distress has gone up at the quickest pace in more than seven years.
Nearly 100,000 more businesses were discovered to be significantly distressed in this year’s first quarter, compared to the final three months of 2020, despite a ban having been imposed on winding-up petitions connected to coronavirus-related debts.
It is a concerning indicator that, in the words of the company that gathered the statistics, “the dam of zombie businesses could be about to break” when the Government’s support arrangements expire.
A bleak picture for hundreds of thousands of UK businesses
According to the data from insolvency specialists Begbies Traynor, over 720,000 firms are now in significant financial distress. The company added that the 15% rise it had seen from the last quarter was the biggest increase since it started its research in 2014.
Begbies Traynor discovered that all 22 of the sectors its research analysed featured companies in financial difficulty – indicating a broad and perilous situation for UK business as the country begins to be released from economic lockdown.
The company considers businesses to be in significant distress if they have minor county court judgements filed against them, or if there has been a marked or sustained deterioration in their key financial ratios and indicators such as working capital, profits and net worth.
Just how bad is the situation facing financially distressed firms?
The newspaper said that bankers and insolvency practitioners had warned of the widespread business failures looming on the horizon when the Government discontinues its pandemic support packages.
The FT added that the end of June marked the first cliff edge, as landlords will be permitted from then to demand that struggling tenants repay more than a year’s worth of rent.
According to business leaders cited by the publication, such a situation could force some retailers and restaurants to hand back the keys if they have not experienced a major uptick in their trading by then, unless landlords are prepared to be flexible about repayments.
This will be followed in the autumn by the anticipated closure of the furlough scheme, which has further helped to support employees and keep businesses afloat.
Already at an end is the Government’s COVID-19 loan programme, with banks now requesting interest on loans that they granted to businesses around a year ago.
“Unmanageable levels of debts”
Julie Palmer, partner at Begbies Traynor, commented: “The dam of zombie businesses could be about to break. Unmanageable levels of debts and subsequent overtrading are likely to be the hidden icebergs waiting to sink even the highest-profile businesses.”
The company’s executive chair, Ric Traynor, added: “Despite the unprecedented central government support offered to UK businesses, it is now clear that many companies are struggling under the weight of increased debt combined with poor revenue streams.”
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