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5,919 Construction Firms Head Towards Insolvency
There are 5,919 construction companies in ‘critical financial distress’ and a further 72,257 construction firms in ‘significant financial distress’ according to the Begbies Traynor Red Flag alert report.
Over the 22 sectors the report covers, there has been a marked increase in the number of businesses in critical financial distress since Q2, up nearly 25% to 37,722 in Q3 2023. Almost 480,000 businesses across the UK are in significant financial distress and about 40,000 more are critical.
There are serious concerns regarding the outlook for the construction sector along with the real estate & property services sectors as critical financial distress has jumped 46% and 38% respectively on Q2.
Construction and real estate companies now account for almost 30% of all companies in critical financial distress as the slowdown in the residential housing market continues to bite.
Consumer confidence
The pressure of higher interest rates, resilient inflation and weaker consumer confidence take have taken their toll. These pressures are now clearly being seen beyond consumer facing sectors and are becoming widespread, particularly within the construction and property sectors.
Interest rates
With many UK companies accustomed to years of near zero interest rates and access to government-backed Covid support loans, the new world of elevated interest rates will continue to push many businesses to the very edge of failure.
Business failures
Julie Palmer, a partner at Begbies Traynor, says: “Tens of thousands of British companies are in financial dire straits now that the era of cheap money is firmly behind us.
“Businesses that had loaded up on debt at rock-bottom rates and were only able to cling on during the pandemic thanks to government support, must now deal with a financial reality check as higher interest rates hit working capital for the foreseeable future.
“Stubbornly high inflation and weak consumer confidence, means many businesses will inevitably head towards failure”
– Julie Palmer
Partner, Begbies Traynor
Construction bellwether
“The construction industry, which has long been a bellwether for the health of the economy, looks particularly vulnerable with over 70,000 firms now in significant financial distress and circa 6,000 in much more serious critical financial distress – often a precursor to formal insolvency,” adds Palmer. “These businesses must now struggle through a period of inflation-eroded margins, weak demand and a looming recession. It is likely to be an insurmountable task for many.
“This latest data highlights how the debt storm, which has been brewing for years but had been held off by several measures to provide breathing space for companies, may very well break. Something that will send shockwaves through the whole economy.”
Zombies
Ric Traynor, executive chairman of Begbies Traynor, says: “The current combination of macro-economic risks is piling on the pressure and really starting to take its toll on UK businesses, as evidenced by the latest research data from Red Flag Alert.
“I am hopeful that stabilising inflation and interest rates will start to slow the rising levels of distress in the economy in due course, but history dictates that this will take some time and insolvencies often peak long after a recovery has started. Unfortunately for many businesses, time is not on their side.
“The ongoing geo-political uncertainty, which is particularly affecting commodity and energy prices, coupled with high interest rates, weak consumer demand, sticky levels of inflation and an anticipated recession over the coming year, may simply prove too much for many of these distressed businesses.
“So, given the challenges the economy still faces, the outlook remains pretty bleak and I expect many more ‘zombie’ companies to continue to fail for some time to come as the impact of this economic backdrop makes them increasingly unviable.”
Top 10 sectors in critical financial distress by number of companies:
1. Construction (5,919)
2. Support Services (5,741)
3. Real Estate & Property Services (4,994)
4. Professional Services (3,032)
5. General Retailers (2,759)
6. Telecommunications & Information Technology (2,264)
7. Health & Education (1,924)
8. Media (1,481)
9. Food & Drug Retailers (1,222)
10. Bars & Restaurants (1,073)
Top 10 sectors in significant financial distress by number of companies:
1. Support Services (75,589)
2. Construction (72, 257)
3. Real Estate & Property Services (51,240)
4. Professional Services (44,491)
5. Telecommunications & Information Technology (32,234
6. General Retailers (30,177)
7. Health & Education (30,176)
8. Media (18,921)
9. Financial Services (15,123)
10. Other Manufacturing (13,535)
Picture: 72, 257 construction firms are in the financial danger zone.
Begbies Traynor is a major insolvency practitioner.
Article written by Cathryn Ellis
08th November 2023