New data from financial risk and business intelligence firm Red Flag Alert shows there’s been a 6% increase in the number of struggling companies in London.
Analysis of the capital’s businesses from Q1 this year shows 130,262 were experiencing significant financial distress, compared to 123,163 for the same period in 2019.
London’s 6% rate of change since Q1 last year is just above the national average of a 5% rise in businesses at serious risk of failure. There are now 509,637 companies nationwide in significant financial distress – the first time the level has passed the half-million mark since Red Flag Alert started recording data in 2004.
The company’s analysis shows the UK’s food and beverage (7%), hotels and accommodation (7%), bars and restaurants (5%), logistics (5%) and leisure activities (5%) sectors have seen some of the largest rises in distressed businesses since Q1 last year.
Partner at Red Flag Alert, Mark Halstead said, this was to be expected because of the business disruption caused by coronavirus.
Halstead said, “These sectors started to the feel the economic impact of the virus before the national lockdown. People took notice of early social distancing advice, which led to a decline in spending on travel and tourism, high streets and going-out. This quickly affected supply chains and is why the logistics sector is up there with the likes of bars, hotels and restaurants.
“Immediate drops in revenue will prove extremely difficult for many of these struggling companies because they are already operating with very limited cashflow and low cash reserves. Government support in the form of the furlough scheme and low interest loans will help some businesses address financial and operational challenges in the short-term, but rising levels of insolvent debt will prove terminal for many later this year and into 2021.”
Red Flag Alert analysis shows corporate debt could double to £8.6bn this year because of COVID-19, while levels next year could surpass £15bn. This would mean companies have to contend with almost £24bn in unpaid invoices between now and the end of 2021.
Mark Halstead concluded, “Typically, based on analysis from the past three years, around 3% to 4% of businesses in significant financial distress will fail each year. COVID-19 will see this rate of failure rise substantially this year, reaching well into double figures. This will leave a trail of insolvent debt that will lead to a spike in companies going out of business in the next 12 to 18 months.
“As well as looking for ways to address lost sales caused by coronavirus, companies need to be focusing on how they protect themselves against debt. They should be tightening-up their creditor services and regularly health-checking the financial performance of the organisations they deal with, whether that’s customers or suppliers.”