IT IS a known fact that when recession strikes there is a lag between companies beginning to feel the pain and actually getting into real difficulties. This time around it is no different and, with just days to go until the Comprehensive Spending Review is unveiled, many UK businesses that are already struggling are hoping the cuts don’t finish them off.
Begbies Traynor’s latest Red Flag research for the third quarter of 2010 shows there are high levels of distress with more than 123,000 companies facing significant or critical levels of distress. Collectively they owe £57.5bn to creditors, suppliers and service providers. This represents a significant risk to the continued recovery of the UK economy.
Worryingly for the City of London, more than 4,200 of these struggling companies are based in the Square Mile and include small businesses supplying services such as cleaning, office equipment and secretaries. While the statistics don’t directly affect the big banks, fund managers and insurance companies, the amount of debt sitting as an asset on the balance sheets of lenders and creditors should be a cause for concern.
And it’s worth bearing in mind those struggling are the small, independent retailers, the dry cleaners, the florists – the clusters of small businesses that go to give our City streets their colour and stop them becoming a bland, sterile environment devoid of real life and quality services.
“No company is an island,” says Nick Hood, partner at Begbies Traynor. “Individuals having problems means suppliers, banks and other stakeholders have all got problems as well as there’s a hole in their financial positions.”
Of course, not all these firms will go bust but that debt remains at risk. Fortunately many thousands of struggling companies will be winners and emerge from the slump because they recognised their problems early, have reached out for professional help and have been realistic about the difficulties they face.
Hood says restructuring experts have been approached by bankers seeking out help for their debtors, directors who recognise their companies need help, and creditors seeking assistance. “The problem is they never seek help early enough,” Hood says.
Other companies will escape the rot having made informal arrangements with their creditors behind the scenes.
Begbies Traynor urges those businesses to formalise such arrangements, as they’re not currently legally binding, while creditors remain more sympathetic or risk harsher terms or adverse actions in the future.
With the Comprehensive Spending Review just days away, City-facing businesses that find themselves struggling need to take action now.