Largest number of firms going bust since 2009

The number of companies going out of business this year is on track to be at its highest since the Financial Crisis. The latest official figures, as reported by the BBC¹, show that insolvencies have increased by 10% in the third quarter of 2023 compared to the same period in 2022.

There has also been a notable rise in companies at serious risk of going bust. Firms that are considered in “critical financial distress” are said to be up by 25% over the third quarter of 2023 compared to the same period a year ago. A company is considered in critical financial distress when a County Court Judgment (CCJ) has been issued against it for a debt of £5,000 or more, which fits the description of around 38,000 businesses right now.

Insolvency statistics since 2000

The same BBC publication analysed the rate of insolvencies over the last two decades. Between the turn of the century and the Financial Crisis of 2008 and 2009, the number of insolvencies in England and Wales hovered just above 4,000 per year on average. After the Financial Crisis occurred, the number of insolvencies rose dramatically to almost 7,000 per year. Annual insolvencies reduced over the years following and dropped to long-term lows after 2020. However, since the pandemic ended, insolvencies have climbed steeply and now resemble a similar picture to that of 2009 – although we’re not on track to reach the same number of insolvencies in 2023.

What’s causing increased insolvencies?

As reported by the BBC¹, Julie Palmer of Begbies Traynor suggests that the number of businesses going bust is due to a combination of high inflation, high borrowing costs and weak consumer confidence and demand.

More specifically, she referenced businesses that had previously loaded up their debt with exceptionally low rates but now need to deal with higher interest rates. Moreover, many businesses that only managed to stay afloat due to government support during the pandemic are now left to cope in difficult markets independently.

The construction sector is one of the worst affected and where businesses are more likely to go insolvent. The increased cost of building materials is pricing many homeowners out of the market, meaning demand has slowed down leaving many companies without sufficient long-term work. Fluctuating material costs have also made it difficult to quote on building work.

What does this mean for interest rates?

The Bank of England increases the base rate of interest to reduce inflation. By increasing interest rates, it is understood that people will be more likely to save and less likely to spend. The problem with this is if it goes too far – which some people have accused the central bank of doing – then businesses will suffer and we could be pushed into a recession.

The latest data may encourage the central bank to stop any more rate hikes due to the risk of more business casualties and a UK recession. However, the bank uses an array of data to make its decisions, so nothing can be guaranteed.  

Sources

1.    https://www.bbc.co.uk/news/business-67261798

All the information in this article is correct as of the date of publishing. The opinions expressed in this publication are those of the authors Euxton Mortgage Market. The information provided in this article, including text, graphics and images does not, and is not intended to, substitute advice; instead, all information, content and materials available in this article are for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information.

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November 2023