Insolvency risk for businesses’ set to fall for the coming year

27th June 2023

As the outlook for the UK economy continues to remain uncertain, business owners’ fears over insolvency have dropped considerably according to research by Evelyn Partners.

The research finds that just under one in three (32%) UK businesses surveyed acknowledge there is a risk that they will become insolvent in the next 12 months. While a high proportion, this is down considerably from September 2022, when 47% of firms believed there was a risk of insolvency.

Corporate insolvencies are at a four-year-high according to the latest government data. However, with prospects of insolvencies easing, the research could indicate that these figures are reaching their peak.

The research of 500 business owners with revenues of £5m upwards indicates that business confidence has remained largely stable over the past nine months, with 77% of businesses confident they will survive an upcoming recession, in line with the 78% that reported the same confidence in September 2022.

This stable outlook comes despite the challenges that have arisen in the intervening period, including sticky inflation, ongoing rate rises, toughening lending criteria and higher taxes.

Businesses now seem to be in a stronger position to weather this uncertainty and have rowed back from plans to batten down the hatches.

In September 2022, over half (52%) of businesses expected to embark on a round of redundancies, this has now dropped to just over one in three (36%).

Almost one in two (48%) businesses thought it likely they would need to withdraw from a key market in September 2022, a risk that has since dropped to just less than one in three (32%).

The risk of legal challenges has also dropped considerably in the same period, from 49% to 33%.

Despite this stable outlook, financing and the cost of funding remains a significant risk and challenge for UK businesses.

Instability across the banking sector sparked by the US regional banking crisis has had a direct impact on UK businesses. Less than one in five (18%) UK businesses state they have been negatively impacted by suppressed lender appetite in the wake of the collapse of Silicon Valley Bank.

In the past six months, almost three in ten (29%) UK businesses have faced difficulty sourcing funding, with 9% of businesses stating this has been “very difficult”.

The funding picture does not look set to improve in the near term. With forecasts indicating rates could peak at 5.75% later this year and bond yields at their highest levels since 2008, two in five (40%) businesses believe they will continue to face funding challenges, and almost a third (31%) of UK businesses think there is a risk they will default on their debt in the next 12 months.

With traditional lender appetite suppressed, UK business owners are looking to alternative means of funding to finance their businesses. Of the total capital UK businesses are looking to raise in the next six months, just 12% of this funding will be from traditional banks.

Instead, UK businesses are turning to more alternative means of funding such as credit funds, where 9% of funding is set to be raised in the next six months.

To bolster their capital reserves, businesses are also turning to their assets. The lease back of physical assets is set to raise 10% of total capital in the next six months, while sale of operational assets is expected to raise a similar amount (8%).

Claire Burden, Partner at Evelyn Partners said “Businesses have weathered an exceptionally challenging winter, in which the cost of funding has soared, consumer confidence has taken a sizeable hit and energy prices have rocketed. Emerging out of these challenging months, it is encouraging that business confidence remains stable, and survival prospects have improved as we head into the summer.”

“Businesses are not out of the woods just yet however. Although funding remains in ample supply, banking instability and interest rate rises has led to a buyers’ market. For borrowers and management teams this has resulted in more cumbersome financing processes. Businesses looking to re-finance or source additional funding should therefore start the process early and enlist the support of specialist advisors to help identify funding options and providers best aligned to their business needs.”