Insolvency specialist says construction has most firms considered to be in ‘critical’ financial distress

The number of companies in critical financial distress has jumped by more than a quarter at the end of 2023, with “serious concerns” over construction and real estate firms, according to a report.

The latest Red Flag Alert report from insolvency specialist Begbies Traynor found that 47,477 firms were on the “edge of collapse” in the final three months of last year.

This is up 25.9% on the previous quarter and marks the second quarter in a row where critical financial distress has grown by about a quarter.

Begbies also said that 539,900 UK businesses were deemed to be in “significant” financial distress in the quarter, a rise of 12.9% on the previous three months and 5.6% higher year on year.

The sectors driving this increase were Construction (+15.3%), Health & Education (+19.2%), Real Estate & Property Services (+21.3%) and Support Services (+9.1%).

Begbies’ report showed that all of the 22 sectors assessed saw an increase in critical financial distress but the construction and real estate sectors were among the hardest hit.

Julie Palmer, partner at Begbies Traynor, said: “After a difficult year for British businesses that was characterised by high interest rates, rampant inflation, weak consumer confidence and rising and unpredictable input costs, we are now seeing this perfect storm impacting every corner of the economy.

“Now that the era of cheap money is firmly a thing of the past, hundreds of thousands of businesses in the UK, who loaded up on affordable debt during those halcyon days, are now coming to terms with the added burden this will have on their finances.”

And the firm’s executive chairman Ric Traynor added: “Later this year, we could see some respite for companies as inflation looks like it may reach more palatable levels which in turn should result in interest rates starting to climb down from current heightened levels.

“Unfortunately, there are no signs of an easy fix and, with geo-political uncertainty continuing to rise and a hike in the national wage around the corner, the backdrop is hardly improving for an economy that is still firmly in recovery mode post-pandemic.

“For many businesses, I fear soldiering on in this environment will prove to be one step too far and I expect thousands of debt-laden businesses to start to fail this year.”

Construction topped the top 10 of firms in significant financial distress with just over 83,000 firms followed by support services and real estate and property.