By Jonathan Munnery of UK Liquidators, part of Begbies Traynor Group.
The latest Business Distress Index has revealed the number of SMEs in significant distress now stands at 620,000 an increase of 76,000 in Q4 2020, putting 2.8 million jobs under threat.
The analysed data from Red Flag Alert discovered that since lockdown, 118,000 more SMEs have been plunged into distress – a 23% increase since Q1 2020. In the last quarter alone, there has been an increase of 14%, or 76,000 businesses in distress.
In addition to this, the findings showed that the number of start-up businesses (born after 2017) in significant distress soared by 21% in the last quarter due to the pandemic. There are now 131,000 of these fledgling businesses in distress – a 68% increase since the start of lockdown when there were 78,000 start-up businesses in distress.
These rapid increases in distress for such small and young companies is worrying when considering that the number of corporate insolvencies in 2019 was just 17,196.
Property, Hotels and manufacturing SMEs hard hit by coronavirus
Of the 620,000 SMEs in distress, the analysis revealed that in the last quarter alone there was a 20% increase in real estate and property businesses (Q3 2020, 61,471 to Q4 2020, 73,756) putting 108,000 jobs in danger. There was also a worrying 19% increase in significantly distressed SMEs (Q3 2020, 6,148 to Q4 2020, 7,339) in the hotels sector where restrictions continue to impact, while significantly distressed SMEs also increased in support services by 16% (Q3 2020, 85,628 to Q4 2020, 99,281), manufacturing by 15% (Q3 2020, 20,289 to Q4 2020, 23,262) and travel and tourism by 14% (Q3 2020, 3,983 to Q4 2020, 4,554).
However, when it comes to job protection the order is switched. There are more than half a million (516,000) jobs held by the 99,000 support services businesses in significant distress, 349,000 people employed by 35,000 troubled health and education businesses, and 218,000 people employed by 79,000 construction SMEs.
Small businesses are likely to have less resources and cash reserves in comparison to veteran businesses which highlights the importance of maintaining strong cash flow throughout the pandemic. As businesses live month-to-month, the likelihood of eventually being pushed into company liquidation by a creditor, or following the withdrawal of government support is high.
As large contracts offering substantial payments are hoovered up due to the pandemic, company cash flow is taking a serious hit. Without seeking restructuring advice or a formal solution, such as a Company Voluntary Arrangement (CVA), administration or a Fast Track CVA, insolvency rates could soar.
Fledgling transport start-ups failing to fly
According to the insight, the number of fledgling businesses (born in 2017 or later) in significant distress in the telecoms and IT industry increased by 24% in Q4 2020 (Q3 2020, 5,454 to Q4 2020, 6,779) with an increase of 23% in the media sector (Q3 2020, 3,452 to Q4 2020, 4,231) and 22% in the sport and health club sector (Q3 2020, 1,984 to Q4 2020, 2,427)
These increases are even more stark since the start of lockdown. There are now 82% more telecoms and IT start-ups in distress than at the end of March, and 80% more transport and logistics start-ups in distress since the start of lockdown. Surprisingly, the number of start-ups in the bar and restaurant sector in significant distress has only increased by 54% making it one of the lowest increases across the 22 sectors - this is thought to be due to financial aid from government.
These large increases are also represented regionally with 26% more London start-ups falling into significant distress in the last quarter (Q3 2020 28,567 to Q4 2020 35,884). There was also a 21% increase for fledgling businesses in the north east (Q3 2020 2,257 to Q4 2020 2,742) and the south east (Q3 2020,18,021 to Q4 2020, 21,741).