24 January 2025

Historic jump in the number of firms in critical financial distress

Less than three months after the Budget, critical financial distress climbs by 50% to 46,853 businesses

·    The number of UK businesses in 'critical' financial distress rose by 50.2% quarter-on-quarter to 46,853 in Q4 2024 (Q3 2024: 31,201)

·    The sharp quarter-on-quarter increase was driven by substantial growth in distress in 21 of the 22 sectors covered by Red Flag Alert

·    In particular, consumer facing sectors highlight the concerning picture in the UK economy, with Hotels & Accommodation (+83.6%), Leisure & Cultural Activities (+76.5%), General Retailers (+47.6%) and Food & Drug Retailers (+37.4%) all in worrying states of financial health

·    The number of UK businesses in 'significant' financial distress rose 3.5% on the prior quarter to 654,765 (Q3 2024: 632,756)

·    Year on year, 'significant' financial distress increased 21.3% (Q4 2023: 539,900), as all 22 sectors experienced double-digit growth in 2024

·    At the end of 2024, the sectors experiencing the highest numbers of businesses in 'significant' financial distress include the Construction (97,603), Support Services (90,375), and Real Estate & Property Services sectors (75,394)

The latest "Red Flag Alert" report from Begbies Traynor reveals a worrying surge in the number of businesses in the UK entering 'critical' financial distress in the final quarter of 2024. In Q4 2024, 'critical' financial distress rose by 50.2% to 46,853 companies, underscoring a deteriorating outlook.

Of the 22 sectors covered by Red Flag Alert, 21 saw a noticeable increase quarter-on-quarter in the number of businesses in 'critical' financial distress. The growth in distress was particularly concerning in consumer facing sectors with Hotels & Accommodation (+83.63%), Leisure & Cultural Activities (+76.46%), General Retailers (+47.6%) and Food & Drug Retailers (+37.4%) all increasing significantly.    

This latest research shows a worsening UK economy as we start the new year. In key bellwether sectors, there has also been worrying growth in 'critical' financial distress with the Construction (+58.0%) and Real Estate & Property Services (+63.4%) sectors now representing nearly 30% of all the businesses in 'critical' financial distress.

After another challenging year, 'significant' financial distress rose by more than a fifth in Q4 2024 versus the same period in 2023 (Q4 2023: 554,554), as the uncertain economic environment continued to add pressure on businesses. Importantly, this distress was felt across every corner of the economy as each of the 22 sectors monitored by Red Flag Alert experienced an increase of more than 15% over the year.

At the end of 2024, the sectors experiencing the highest numbers of businesses in 'significant' financial distress include the Construction (97,603), Support Services (90,375), and Real Estate & Property Services sectors (75,394).

Julie Palmer, Partner at Begbies Traynor, said:

​

"As we start a new calendar year, there is very little to be excited about. Across nearly every sector, there has been a unprecedent level of growth in the number of firms who are at serious risk of entering insolvency in the next 12 months. The fact that the distress is being felt across almost every corner of the economy highlights how difficult the outlook is for UK businesses right now.

"After a disappointing Christmas, consumer-facing industries, in particular, are feeling the strain, with rising operational costs and higher wages adding to an already difficult situation. With many such businesses already operating on thin margins, I fear the current situation will undoubtedly push some over the edge.

"Indeed, at a time when consumer confidence is so volatile and borrowing costs look likely to be structurally higher for the foreseeable future, the situation feels very precarious. Sadly, this has only been exacerbated by the tax rises and increase in national minimum wage levied on businesses during the October 2024 UK Budget which means the financial strain on businesses will only increase later this year.

"Even at this very early stage, the outlook for the rest of 2025 is uncertain, at best. Many companies are clearly struggling to adapt to the compounding challenges they face and there is no easy fix which will be very unsettling for businesses who are struggling to tread water already.

"So, in the absence of a reduced tax burden and a strong economic recovery, I expect the number of insolvencies to continue to rise in 2025 as firms struggle to cope with a perfect storm of rising costs, financial instability and fluctuating market conditions."

Ric Traynor, Executive Chairman of Begbies Traynor, commented:

"After a historic rise in 'critical' financial distress in Q4 2024, it's clear that many distressed UK businesses are finding it almost impossible to navigate the challenges they face as we start 2025.

"For many businesses which were already dealing with weak consumer confidence and higher borrowing costs, the increase in national insurance contributions and the national minimum wage, announced at the last Budget, could be the last straw, particularly in labour-intensive sectors like retail and hospitality, who typically operate on razor thin margins.

"For many of these companies, the situation is dire, and this additional burden will almost certainly result in business leaders taking the decision to, at best, reduce headcount or, worse, wind down their operations in the face of insurmountable challenges.

"With the possibility of an emergency tax raising Spring Budget still not off the table, combined with likely increases in tariffs from the new US administration, the outlook for the UK is very uncertain.

"So, I fear 2025 could end up being a watershed moment where thousands of UK businesses 'call time' after struggling to survive for years."

--ENDS--

For further information, contact:

Notes to Editors

About Red Flag Alert

Red Flag Alert has been measuring and reporting corporate financial distress since 2004. It has become a benchmark on the underlying health of companies across every sector and region of the UK.

Red Flag Alert's algorithm measures corporate distress signals, drawing on company accounts and factual, legal and financial data from a wide range of relevant sources, including intelligence from the UK's leading insolvency business, Begbies Traynor. The algorithm was refreshed in H1 2023 to enhance the risk factors analysed in the data. The reported results have been backdated to ensure the consistency of comparative data.

Algorithms which drive Red Flag Alert were improved at the end of 2023, with companies now measured against a new scorecard of indicators to give greater insight and accuracy into the health of businesses. Two years of work by data scientists analysing eight years of data, taking into consideration pre, during and post-pandemic insights to find signals and patterns indicating businesses in distress, combined with AI tools, means that Red Flag Alert aims soon to be able to predict how many companies in trouble will go on to fail.

The release refers to the number of companies experiencing "Significant" or "Critical" problems, which are those that have been identified by Red Flag Alert's proprietary credit risk scoring system which screens companies for a sustained or marked deterioration in key financial ratios and indicators including those measuring working capital, contingent liabilities, retained profits and net worth.

Red Flag Alert is commercially available to all businesses, on an annual subscription basis, to help them better understand risk and exposure and help subscribers to plan for the future. Further information about Red Flag Alert can be found at: www.redflagalert.com

Economically active businesses exclude those that are flagged by Companies House as being, Non-trading, Listed for Strike off / Strike off pending, Insolvent or Dissolved. Companies where there is insufficient information available for RFA to assign a health rating are also excluded.

About Begbies Traynor Group plc

Begbies Traynor Group plc is a leading UK advisory firm with expertise in business recovery, advisory and corporate finance, valuations, asset sales and property consultancy. 

We have over 900 fee earners operating from 45 locations across the UK, together with four offshore offices. Our multidisciplinary professional teams include insolvency practitioners, accountants, lawyers, funding professionals and chartered surveyors.

·    Business recovery

o  Corporate and personal insolvency; business restructuring and turnaround; contentious insolvency; creditor services

·    Advisory and corporate finance

o  Debt advisory and finance broking; corporate finance; special situations M&A; financial advisory

·    Valuations

o  Property, business and asset valuations

·    Asset sales

o  Property, plant and machinery auctions; property and business sales agency

·    Property consultancy

o  Building consultancy; transport planning; commercial property management; insurance and protection

Further information can be accessed via the group's website at https://ir.begbies-traynorgroup.com/