Record number of companies are in critical financial distress

A record number of companies are in “critical financial distress according to latest Red Flag Alert data, which shows that there are 49,309 firms on the brink of insolvency.

The figures mark a 21.4% increase from a year ago.  All 22 sectors surveyed reported a rise in ‘critical’ financial distress over the previous 12 months. Those experiencing ‘significant’ financial distress rose by almost 11% year-on-year to 666,876 businesses. On a quarter-by-quarter basis, this marked a 15% increase on Q1.

This is a stark reminder of just how tough the UK trading environment has become. With over 49,000 firms now in ‘critical’ financial distress, a 21.4% year-on-year increase, it’s clear that many businesses are hanging by a thread. Consumer-facing sectors such as bars, restaurants, and retailers are being hit particularly hard, with critical distress surging by over 40% in hospitality and nearly 18% in general retail.

The latest research shows that the challenges currently being navigated by businesses are triggering concerning increases in ‘critical’ financial distress in consumer-facing sectors, including Bars & Restaurants (+41.7%), Travel & Tourism (+39.0%) and General Retailers (+17.8%).

After some signs of improvement in Q1, this latest research also shows a noticeable decline in the health of the UK economy in the second quarter of 2025. Some of the economy’s key bellwether sectors worryingly saw critical distress rise at pace versus Q2 2024, including the Support Services (+31.3%) and Construction (+15.8%) sectors..

After a challenging second quarter, ‘significant’ financial distress rose by 10.8% year-on-year to 666,876 businesses (Q2 2024: 601,950), which represents a 15.2% increase versus Q1 2025 (579,276). In contrast to the wider picture, there were some positives, and six of the 22 sectors experienced a year-on-year fall in ‘significant’ distress, including Printing and Packaging (23.5%), Manufacturing (11.6%) and Industrial Transportation and Logistics (10.1%).

Julie Palmer, Partner at Begbies Traynor, said “Financial distress has intensified over the past twelve months in every corner of the economy. This means businesses across the UK are facing significant headwinds and many will have to review where they can tighten their budgets or restructure to give themselves more stability in the immediate future.

“This time last year, there was a degree of optimism amongst business leaders who were hoping to see a shift in fortunes in the second half of the year, but fast-forward 12 months and confidence is in short supply.

“Households are still grappling with their finances, and this is keeping consumer confidence volatile. The knock-on effect of this is clear to see in the consumer-facing sectors where margins are thin, growth is hard to come by, and the impact of higher employee costs is pushing many businesses to the brink of collapse.

“So, it is of no surprise to me that while larger pub groups might be performing well, by squeezing out extra efficiencies to counteract onerous price rises, many independent players won’t have the scale to withstand the pressures of this environment for another 12 months if nothing improves.

“In the face of these headwinds, a large proportion of the 50,000 businesses currently in ‘critical’ financial distress need to urgently investigate their options if they are going to weather the storm. With no end in sight to the current economic malaise, I fear the financial burdens companies are enduring at present are simply too high for many not to avoid collapse.”

Ric Traynor, Executive Chairman of Begbies Traynor, said “The sharp rise in critical distress underscores just how tough the economic environment is for UK businesses and it’s abundantly clear that tens of thousands of firms are struggling to stay afloat.

“Small and medium sized businesses across the UK are being put under immense strain by the recent increases to employer’s NI as well as the increase to the national minimum wage. With limited financial headroom to absorb rising costs, many businesses are now reaching a tipping point.

“The result of this is reflected in the latest figures from Red Flag Alert. Critical financial distress is rising across every sector and trading conditions remain very difficult. Alongside this, policy decisions continue to add pressure, so there is a very real risk that more of these critically distressed businesses will move towards formal insolvency over the next 12 months.

“As we enter the second half of the year, the wider economy continues to show signs of strain. GDP fell in May after positive growth at the start of the year, inflation remains stubborn and unemployment has risen to a four year high. Taken together with geopolitical uncertainty, tariffs, dampening business confidence and continued financial pressures, UK businesses have many difficult decisions to make in the coming months.”