As interest rates in the UK reach record highs, more companies are falling behind with debts and becoming insolvent. Find out why the number of company insolvencies is increasing and what you can do to prevent it happening to your business.
With high interest rates and high inflation affecting businesses of all shapes and sizes, it’s perhaps unsurprising that this year has seen a marked increase in company insolvencies. In June 2023, company insolvencies increased by 27% year-on-year.
According to the Insolvency Service, 2163 companies registered as insolvent in June – the highest quarterly number in England and Wales since 2009. Every industry has been affected; 18% of insolvencies came from the construction sector, 16% from wholesale and retail, and 14% from accommodation and food.
But why have rates of insolvency risen to record heights and what can companies do to protect themselves? Read on to find out more.
What is insolvency?
A company declares insolvency or becomes insolvent when it can no longer pay its debts. This might be because it can’t pay its bills when they’re due or that is has more liabilities than assets on its balance sheet.
Companies in this situation are in danger of closure and can even face legal action from creditors if they’re unable to get their finances back on track. Registering as insolvent can be done on a voluntary basis or forcibly imposed by HMRC.
Why has the number of company insolvencies increased?
There are several different reasons why the number of company insolvencies has increased in recent months:
High interest rates
Rising interest rates are impacting businesses in a variety of different ways. Those who secured loans at low rates are now finding it especially hard to navigate refinancing or renewing their facilities in the new financial climate post-Covid-19.
Higher interest rates increase the cost of borrowing, so companies with a large amount of debt on their balance sheets might find that their tight margins are squeezed even further as they struggle to keep up with their repayments. Some businesses are also finding it difficult to repay loans taken out to stay afloat at the height of the pandemic.
Restricted lending environment
Alongside rising interest interests, lenders are becoming more risk adverse and are less willing to off finance to businesses. This means that companies that rely on credit to operate are now unable to refinance their existing loans or find new facilities.
This cautious lending environment has also impacted investors, making fundraising more difficult. Smaller start-ups without the user base or revenue to reassure potential investors may find it especially tough to convince investors to take a chance in the current economic climate.
The trickle-down effect of this reduced investment and restricted lending is that suppliers are chasing their own debts, putting pressure on vendors as they struggle to manage their own cashflow challenges.
Consumer behaviour
High interest rates don’t only impact companies, they also affect the spending power of consumers. Many households are facing mortgage rate increases as they also try to navigate the rise of inflation and its impact on their energy, food, and fuel bills. As everyday essentials become more expensive and wages fail to keep pace, people are forced to be more intentional with their spending.
Consumers tightening their belts impacts a variety of different industries; people might cut back on dining out, put off shopping for clothes and other luxuries, postpone travel, and delay non-urgent home improvements. This cutting back can make it harder for all affected businesses to turn a profit.
Economic stresses
The Bank of England has increased interest rates in response to rising inflation, but those aren’t the only economic stressors forcing UK companies into insolvency. The lasting impact of the Covid-19 pandemic and Brexit has led to problems such as a shortage of labour, increased red tape, and delays with both importing and exporting within the EU. The war in Ukraine has also led to geopolitical uncertainty, which has an economic effect.
What can companies do to avoid insolvency?
The good news is that there are steps that companies can take to avoid insolvency. There are also several alternative options to consider if you own a business that’s falling behind with its debts:
Stay vigilant
The more you know, the easier it is to make changes that can minimise difficult situations ahead of time. Keep a close eye on your finances and stay vigilant for any early signs of potential problems. These might include seeing an increase in the amount of stock you’re holding, cashflow issues, or difficulties paying your property rent, employees, or bills.
Restructure your business
No business owner enjoys making the tough calls, especially when they impact your employees, but sometimes undergoing a restructure is the only way to avoid company insolvency. This process doesn’t only mean reducing your headcount, you could also look to identify efficiencies in your production process, implement more automation, or streamline your product range. Making sure that you’re always running your business as cost-effectively as possible is a good way to ensure you can navigate unexpected economic challenges.
Seek advice
No matter whether you’re a company founder, CEO, COO, or CFO, there’s no shame in asking for advice – the earlier, the better. Seeking help as soon as you identify a potential problem can help you identify the right solution for your organisation and maximise the time available for any changes you make to take effect. An external specialist in managing debt could lend an impartial ear, explain all the different options available, and support you through the process.
Secure an informal agreement
If you’re falling behind with your debts, you might be able to make an informal agreement with your creditors until you get back on track. As these types of arrangements aren’t legally binding and creditors can withdraw at any time, they’re usually best suited to companies experiencing temporary difficulties.
Get in touch with your creditors and try to negotiate a compromise that will allow you to stay trading and repay your debts, just with different terms. Keep in mind though that some options, such as extending your loan term to lower your monthly repayments, could increase the amount you pay overall due to the added interest.
Enter a Company Voluntary Arrangement
A Company Voluntary Arrangement or CVA is a legally binding agreement between your company and its creditors. It must be facilitated by an Insolvency Practitioner, and some charges apply, but you could also end up with an agreement and an affordable payment schedule that lets you pay all or part of your debt and continue trading. All your creditors don’t have to agree to the terms of the CVA, but those representing 75% of your debts must be on board for the agreement to be approved.
Enter administration
When entering administration, your company will be handed to an Insolvency Practitioner – also known as an Administrator – who will look for ways to help the business recover and repay its debts. The company can usually continue to trade while in administration, but your creditors will be prevented from taking any legal action against you or pushing for compulsory liquidation without the court’s permission.
To restore the business’ viability, the Administrator might propose coming to a new arrangement with your creditors, selling the business, or releasing some of its assets to pay your debts. No matter what solutions they propose, your creditors will need to agree to them before you can move forward.
Struggling to keep up with your business debts? Our friendly team of experts is here to help. Give us a call on 0161 8260 585 or send a message here
