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03/05/2011

Worry intensifies among businesses with debt concern

One in four (24%) businesses are concerned about their debts, according to the third wave of insolvency trade body R3’s Business Distress Index. For those businesses that are concerned about their debt, their worry has intensified during the last quarter, with small businesses particularly vulnerable.
The most significant increase is concern over bank loans and other finance debt. 43% of businesses concerned about their debts are now worried about these types of debt; this compares to just 24% in September 2010 – an increase of 19%. It points to an escalation of financial difficulties among those who have been struggling for a number of quarters. Overall, finance and bank loans remain the type of debt businesses are most concerned about.

Frances Coulson, R3 President, said:
“An alarming minority of the business community are struggling to address their financial woes. If these distressed businesses continue along this downward trend they may lose control of their mounting debt, which will push them into insolvency in the coming quarter.

“These businesses are allowing their debts to manifest instead of being able to pay them off; things aren’t improving for these businesses which are of real concern at a time when monetary and fiscal policy should be benefitting businesses. These businesses are likely to fall on hard times when interest rates inevitably rise, making it more difficult to service their debt.”

The research reveals small businesses who express most concern about their debts, across all debt types. Nearly a half (46%) of small businesses are now worried about bank loans and other finance debt, compared to 34% last quarter. 38% of small businesses are now worried about debt owed to trade creditors - a jump of 14% from the previous quarter. Concern about crown debts has also risen, at 41% - a 5% rise from the previous quarter.

The distressed signs small businesses are experiencing are mostly tied to cash flow. A quarter explicitly state they’re having cash flow difficulties (25%); one fifth (19%) are struggling to pay invoices on time; 17% are using their maximum overdraft facility and 6% have sold assets to maintain cash flow. Small businesses are likely to have a much smaller ‘buffer zone’ compared to large and medium businesses, and therefore cash flow problems can escalate quickly with damaging consequences.

Coulson said:
“Cash flow difficulties coupled with debt concern paints a worrying picture for small businesses. Results from the barometer in December 2010 revealed high levels of distress and debt concern. We assume this is due to the adverse weather conditions and expected businesses to have a bleak outlook during those difficult trading conditions. The fact that some of those results have been compounded or increased this quarter is alarming. Businesses haven’t just hit a bump in the road but have sustained financial problems. These could be ‘zombie’ businesses that are unviable; when changes to monetary and fiscal policy become less favourable they are likely to go insolvent.

“Despite the worrying minority, the report reveals signs of distress on the whole have decreased this quarter, which is extremely positive for the majority of businesses who seem to be bouncing back from the recession.”


Notes to editors:
Methodology: BDRC Continental conducted 501 telephone interviews with small, medium and large business owners and Financial Directors between 7th and 18th March 2011. Quotas are set by size, region and sector and the data weighted to the profile of GB businesses. The respondent in each case is a senior financial decision maker. Small businesses are those with a turnover of £50,000 to £1million pa.


R3 Press Office

Notes to editors:

  • R3 is the trade body for Insolvency Professionals and represents the UK’s Insolvency Practitioners.

  • R3 comments on a wide variety of personal and corporate insolvency issues. Contact the press office, or see www.r3.org.uk for further information.

  • R3 promotes best practice for professionals working with financially troubled individuals and businesses; all R3 members are regulated by recognised professional bodies
     
  • R3 stands for 'Rescue, Recovery, and Renewal' and is also known as the Association of Business Recovery Professionals.