Insolvencies: Is it as bad as it seems?

We are emerging into a very different economic climate in this post-pandemic world. For many, this shift was due to signal the end of restrictive measures, financially and otherwise, and hopefully the start of a stronger year. However, the record number of insolvencies occurring in the UK tells a very different story

The number of registered company insolvencies in January 2022 was 1,560, more than double the number registered in the same month last year. These figures can partly be attributed to the way the statistics fall – this year’s figures compared to the very low base point of insolvencies during the pandemic are bound to appear more extreme. But there are certainly other underlying issues at play.

‘Stealth’ mode
Through the pandemic lots of companies were able to go into ‘stealth mode’ to survive, bolstered by support schemes such as Bounce Back Loans (BBLs). But now, despite returning to profitability, may are also facing the reality of debt repayments. Some will be evaluating whether to work for the next five to ten years to offload that debt, or to liquidate and buy back their assets, leaving the debt behind.

With most support now finished, businesses have looked to kick their operations into the next gear to ensure that they are in the strongest and most stable position possible. But several potential roadblocks to growth still exist; prices for materials are increasing and the dregs of Brexit are still playing havoc in supply chains. Both of which are putting the greatest strain on smaller construction companies, and the hospitality and retail industries.

There are also sectors that haven’t had the chance to fully recuperate; those that rely on exhibitions for example, have not yet been able to become completely operational to recover costs.

Not only is support being phased out, so too are the extra protections from financial hounding that consumers had been benefitting from. During lockdown, HMRC and other creditors were unable to put pressure on companies to liquidate. The restarting of this, after a two-year hiatus, would on its own be enough to put some companies onto the rocks, both financially and emotionally. The remaining protections in place for landlords will finish at the end of March, potentially resulting in further businesses being unable to meet costs.

Problems such as debt have been kicked down the road for a while, but it is now time to pick them back up, a process which will negatively affect some companies.

So, what will the next year hold?
It is very difficult to say how the year will play out. But it is likely that there will be an uptick in insolvencies in small to medium-sized businesses. As with recessions, the pandemic has had the unlikely side-effect of allowing some businesses to continue which would not have been able to without the support given. These businesses will now be going it alone, to either sink or swim.

The real test will come when everything returns to normal. The pandemic had a strange way of levelling the playing field in certain industries. With everyone being in the ‘same boat’, some delays would be forgiven more readily, and disrupted debt chains were met with much more understanding – this will no longer be the case.

On top of this, there is a real sense from those who have struggled for a long time that they are now feeling unable or unwilling to carry on. COVID-19 has had an impact in more ways than one. It has allowed people to press pause on the daily grind, evaluate what they might want to achieve and consider whether this might be the right time to bring something to an end.

What businesses can do to avoid or negate the impact of insolvencies
Ensuring that internal reporting is up to date will help to identify and flag problems in the first instance but taking advice as early as possible from a variety of professional advisers will give companies the best chance of a more positive outcome. Recognition of the problem is the first barrier and burying your head in the sand, although tempting, will only make matters worse.

Speak to creditors like your bank as soon as you can. It’s not always easy to talk, but it’s crucial. And if it’s done appropriately, they will be far more inclined and able to support you. HMRC, for example, may give you time to pay arrangements.

If you need support, or just want to speak through your options with a financial expert, reach out to us today - contact Steve Elliott.

The first step is a completely free and confidential consultation. We will use this time to understand your financial circumstances, where you are now and where you need to be.

We provide real, practical, down-to-earth advice on how to tackle your problems, including help with restructuring debts and negotiating informal arrangements with creditors. https://www.monahans.co.uk/services/business-recovery-insolvency

Steve Elliott