SMEs approaching tipping point ahead of interest rate rise - Latest Red Flag Alert Report for Q2 2014
Latest Red Flag Alert Report for Q2 2014
* 237,000 companies in Significant Financial Distress, rising more than 60,000 compared to Q2 2013
* Interest rate rise of just 1% likely to impact a material number of the c.218,000 SMEs already experiencing 'Significant' distress
* Most severe distress falls as current low interest rates keep SMEs from critical list this quarter
According to the latest Begbies Traynor Red Flag Alert, which monitors the financial health of “Corporate UK”, levels of ‘Significant’ distress among UK businesses increased by more than 34% over the past year from 176,677 in Q2 2013 to 237,362 in Q2 2014, marking the third consecutive quarter of deterioration for this growing group of struggling businesses.
The data separately revealed that levels of more severe ‘Critical’ distress fell by 9% over the past 12 months to 2,745; a less substantial volume when compared with the companies suffering ‘Significant’ distress but, positively, the ninth consecutive quarter of year on year improvement in this category.
The research reveals that levels of ‘Significant’ distress have been primarily driven by small to medium sizes businesses (SMEs), who experienced a 40% rise in distress over the past 12 months to 217,855 (Q2 2013: 155,253). Meanwhile, among large companies distress levels actually fell by 9% to 19,507 over the same period (Q2 2013: 21,424).
The deteriorating fortunes of SMEs spells bad news for the economy at a time when there are a number of near term challenges on the horizon for UK businesses, including political change, a stubborn lending environment and the prospect of interest rate rises.
With market commentators predicting that Mark Carney could announce a rate increase as early as November, Begbies Traynor estimates that a rise of as little as 1% could result in dire straits for a material number of the c.218,000 SMEs already suffering ‘Significant’ distress, many of which are still burdened with significant debts accumulated during the recession.
According to Begbies Traynor, recent positive reports that business confidence is now at a 22 year high1 may also be a contributing factor to the latest rise in distress levels, as SMEs overstretch themselves without financial support to try and keep pace with the wider UK recovery.
Julie Palmer, Partner at Begbies Traynor, said: “Despite rising distress levels, SMEs are more optimistic than ever about their outlook and as such they are expected to fuel job creation over the coming year. While this is a positive sign that SMEs are preparing for growth, without funding and careful financial planning this will only increase their business’ cost base; one of the principal causes of severe ‘Critical’ distress within the SME community.”
"Access to funding is still a major issue for a huge number of UK SMEs. Although traditional bank finance is now widely available for those firms fortunate enough to comply with mainstream lending criteria, it remains a different story for businesses in complex or challenged circumstances. Our latest Red Flag findings once again underline the critical importance for current government initiatives to increase the diversity of funding providers and to better signpost alternative business finance."
“It is crucially important that Mark Carney exercises tightrope precision in his decision on the timing of interest rates rises if he wants the UK to return to more normalised conditions, without initiating an emergency stop on its economic recovery.”
Ric Traynor, Chairman, Begbies Traynor Group, commented: "While low interest rates and creditor forbearance continue to ensure that businesses are kept off the Critical list, you just need to scratch beneath the surface to see clear signs of a twin track economy. While larger corporates have taken full advantage of the market opportunities available to them, a growing number of SMEs are overtrading and risk falling at the last hurdle.”
“The UK needs SMEs to be able to take on new orders, recruit staff and invest in growth if they are going to contribute to the broad-based economic recovery. But without adequate funding in place, this kind of investment can only be achieved by overstretching their finances, leaving them little leeway should things take a turn for the worse or if growth accelerates leading to greater working capital needs - a risky strategy at a time of growing political and monetary policy uncertainty.”
1 Lloyds Bank Business in Britain report – June 2014