Higher interest rates are pushing an increasing number of companies into insolvency, according to one of the UK’s biggest insolvency practitioners.
Begbies Traynor said it expected to see more businesses tip into insolvency “in tandem with the indicators of corporate financial stress in the UK”, alongside its financial results published on Monday.
The Bank of England has raised interest rates from 0.1% at the end of 2021 to 5.25% to try to tame inflation. That has significantly increased the cost of borrowing for UK businesses, preventing many from papering over the cracks with cheap debt. Interest rate increases also have the effect of reducing spending in the economy, giving indebted companies little way out.
Ric Traynor, the executive chair of Begbies Traynor, said the company had seen an “increase in insolvency numbers reflecting the current interest rate and inflation environment”.
The company’s revenues from insolvencies rose by 17%, and it said that “corporate distress levels continue to increase”.
Economists expect the UK’s recent weak economic performance to continue into 2024. Forecasts from professional economists compiled by the Treasury suggest that UK GDP will grow by only 0.5% in 2024, the same rate as 2023. Although suggesting the UK will avoid a recession, that level of growth would remain far short of the 2% annual average before the financial crisis of 2008.
The number of corporate insolvencies in the year to 30 September increased by 17% to 24,326, according to data from the Insolvency Service. Begbies Traynor said that increase had largely been from liquidations, which tend to be requested by smaller companies, but added that administrations were also “approaching pre-pandemic levels” after a period in which companies were given more leeway on some debts. Administrators tend to be called in to larger, more complex businesses.
Insolvency practitioners have a real-time insight into the pressures facing businesses, although they by contrast tend to benefit from an increase in work when times are tough for the wider economy. Begbies Traynor said it had increased staff numbers by 12% over the past year to cope with the expected influx of new business.
The company reported a “resilient” performance in its financial advisory business, as more companies sought to refinance or restructure their businesses. That made up for a decline in revenues from investments or mergers and acquisitions, with fewer businesses feeling able to spend.