By Claire West

According to research by insolvency trade body R3, almost 10% (or 148,000) of small businesses fear they could be pushed into insolvency if they lose their public sector contracts. This is reflective of an overall trend, with one third of small businesses describing themselves as ‘reliant on contracts from the public sector’. This ‘worst case’ scenario would have a dramatic effect on the current levels of corporate insolvency. To provide some context, business failures ran to 26,000 for the whole of 2009.

R3’s President Steven Law commented:
“It is of course highly unlikely that all public sector contracts will be withdrawn and the figure of 150,000 business failures would represent a worst case scenario. Yet with the prevalence of small businesses in the UK and an increasing reliance on public sector contracts dating back to 1990s, these cuts are likely to be felt extremely keenly. Businesses need to be aware of this risk and seek professional advice before this reliance on public sector work threatens their survival. We have just seen the recent case of the Connaught collapse, blamed on local authorities deferring spending on contracts after cuts.”

The research finds that of all small businesses:
•24% (or 377,000 businesses) would see their profit reduced if their public sector contracts were pulled
•16% (or 253,000 businesses) would be unable to fund expansion
•14% (or 216,000 businesses) would consider job losses
•11% (or 173,000 businesses) would be in serious financial trouble

Steven Law added: “Worryingly these results suggest that a significant proportion of small businesses, which rely on Government contracts are going to struggle to fund expansion and modernise. They have already drawn heavily on their reserves to survive the recession and they will be unable to compete in the market as the economy grows.

“This comes against a backdrop of corporate insolvency figures being kept down by HMRC’s Time to pay agreements and historically low interest rates,” concluded Steven Law.