Financial Distress Hits London Businesses

130,262 London businesses are now in financial distress, compared to 123,163 during the same period in 2019 – that’s a 6% increase.

• 130,262 businesses in London are now in significant financial distress.
• The number of companies in the capital struggling for survival has increased 6% compared to this time last year.
• Covid-19 pushes the total number of financially distressed companies in the UK over the half-million mark for the first time in Red Flag Alert records.

The analysis of businesses from Q1 this year shows that the 12-month increase in the number of businesses at serious risk of failure in the capital was just above the national average growth of 5%.

Nationwide, there are now 509,637 companies in significant financial distress – the first time that this figure has gone above half a million since Red Flag Alert began recording data in 2004.

The sectors which have shown the biggest increases in distress since Q1 last year are food and beverage (7%), hotels and accommodation (7%), bars and restaurants (5%) and leisure activities (5%).

These sectors started to feel the economic impact of the virus before the national lockdown. People took notice of early social distancing advice, which led to a decline in spending on travel and tourism, high streets and going out. This quickly affected supply chains and is why the logistics sector is up there with the likes of bars, hotels and restaurants.

Coronavirus Freezes UK Economy

After an encouraging start to 2020, UK businesses were hoping to see growth following the Brexit malaise.

However, coronavirus has instead frozen large sections of the economy, with the latest Lloyds Bank Commercial Banking Business Barometer showing that business confidence across the UK has fallen 38 points to -32% during April.

Companies in the capital reported a particularly sharp fall, dropping 40 points to -28%. This is compared to the least negative region, Yorkshire and Humber, which was at 19%.

The capital has been cited as being particularly vulnerable to the effects of the lockdown due to its large working population and extensive public transport network.

Nationally, 78% of the companies surveyed in the report had seen reduced demand for goods and services, compared to just 12% that saw it rise.

Around half were operating at 50% capacity and one in ten was not operating at all – 72% of businesses experienced disruption to their supply chain in April.

Confidence also fell across all four sectors analysed in the report, with manufacturing dropping 46 points to -35%, retail to -33%, services to -22% and construction to -20%.

 UK Vulnerable to Bad Debt

Many distressed companies were already struggling and may have been operating with limited cash flow and low reserves. The immediate drop in revenue caused by the lockdown is likely to have compounded their difficulties further.

Government support such as the Job Retention Scheme and low interest loans will help some businesses in the short term, but rising levels of insolvent debt will prove terminal for many over the next 18 months.

Nationally, the economic disruption caused by Covid-19 will see unpaid business debt double to £8.6 billion this year.

Prior to the coronavirus outbreak there were 490,000 UK companies in financial distress, of which we would expect around 3–4% to fail each year. The economic impact of Covid-19 will see this rate of failure rise substantially.

This could see levels of bad corporate debt in 2021 rising beyond £15 billion, leading to a spike in the number of companies going out of business in the next 12 to 18 months.

With its higher percentage of businesses in financial distress, London could be hard hit by this bad debt crisis.

Not only do London businesses need to identify ways to address lost sales caused by coronavirus, they also need to protect themselves against debt.

 They should be tightening up their risk management and regularly health-checking the financial performance of the organisations they deal with, whether that’s customers or suppliers.

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