By Daniel Hunter
Corporate Insolvency figures have made the headlines over the last few years and like most barometers of economic health there has been little to cheer about.
However in the last two quarters, insolvencies have actually decreased and in this quarter hit the lowest level for seven quarters. On the face of it, it sounds like great news but businesses are still facing ongoing problems which are being masked by the current low interest rates.
Many businesses are only just surviving, teetering on the edge, just covering the interest on their debts and their future is dependent on their creditors’ forbearance. If these ‘zombie businesses’ were hit with unexpected costs; reduced orders, bad debts or increases in working capital this could actually push them over the edge - meaning many are in a very precarious position.
"Growth in the UK economy remains flat and we are still living in highly uncertain times," Chris Ratten, Head of Restructuring at RSM Tenon said.
"The threat of an unprecedented ‘triple-dip’ recession is never far from everyone’s minds, despite the economy showing it has officially grown out of recession. Fiscal austerity, higher energy and food prices, credit constraints and the ongoing Euro crisis, are all presenting significant downside risks to the UK economy.
"The private sector is expected to deliver growth and investment so the Government must support it by improving the availability of credit or the recovery will never gather momentum. However, we believe this year corporate insolvencies will hit the same levels as the previous two years — approximately 21,000 insolvencies."
The latest statistics show the sectors worst hit over the summer months are: transport services; vehicle manufacturers and agriculture; with an increase of 20 per cent, 7 per cent and 7 per cent respectively.
"The automotive sector is certainly having a bad time in October after Ford decided to close its Transit van manufacturing facility in Southampton and Manganese Bronze — the Coventry based manufacturer of the iconic London black cab - was forced to call in administrators after a rescue deal could not be found," Ratten added.
"These cases on their own are likely to cause a severe knock on impact on component suppliers in the UK and they must react quickly to try and capture new business and seek advice before their position worsens. In the current market it is no surprise that big ticket or luxury items are hit first as people try and make do rather than increase their debt levels."
In the last 12 months, RSM Tenon has witnessed an increase in the number of SMEs becoming insolvent due to the current credit and trading conditions being enforced by their larger clients. Many large businesses are using their scale to push out payment terms on their smaller suppliers, therefore causing a detrimental effect on SMEs’ cashflow. This is being compounded by the increases in energy prices and the lack of funding support.
"SMEs must be open and honest with their clients and ensure that payment terms are agreed upfront and in writing before they become unstuck. It is also important that they look at the financial history of their prospective clients to ensure the likelihood of a bad debt is minimised," Ratten concluded.
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