Thursday, 30 October 2025

Critical Financial Distress Soars Across the Economy Ahead of Budget

UK businesses look for economic certainty in November's Budget following a 78% increase in 'Critical' financial distress over the last 12 months

Highlights:

·      The number of businesses in 'critical' financial distress surged 78.0% year-on-year, with 55,530 companies affected in Q3 2025 (Q3 2024: 31,201)

·      This was also a 12.6% increase in the number of businesses in 'critical' financial distress versus the prior quarter (Q2 2025: 49,309)

·      Of the 22 sectors covered by Red Flag Alert, 21 experienced a rise in 'critical' financial distress of more than 40% versus the same period last year

·      Consumer-facing industries continue to be under the most severe pressure, with Leisure & Cultural Activities (+96.7%), Hotels & Accommodation (+92.5%) and General Retailers (+85.6%) experiencing some of the most extreme increases in 'critical' financial distress

·      'Significant' financial distress also increased 14.8% year-on-year to 726,594 firms (Q3 2024: 632,756), following a 9.0% rise from 666,876 in Q2 2025

·      Of the 18 of 22 sectors experiencing an annual increase in 'significant' distress, Utilities (+35.8%), Real Estate & Property Services (+31.8%) and Financial Services (+22.2%) witnessed the highest growth

The latest Red Flag Alert report from Begbies Traynor, which has provided a snapshot of British corporate health for almost two decades, has revealed a 78.0% year-on-year increase in 'critical' financial distress as higher taxes on businesses, economic uncertainty and inflation weighed on the UK economy.

As of 30 September 2025, 55,530 companies were in 'critical' financial distress, a 12.6% rise on the previous quarter (Q2 2025: 49,309). Notably, this rise in 'critical' distress was widespread, with 21 of the 22 sectors monitored by Red Flag Alert reporting a considerable deterioration in their financial health compared with the same period last year.

The data paints a particularly difficult picture for consumer-facing industries, which continue to bear the brunt of the ongoing economic uncertainty. Leisure & Cultural Activities (+96.7%), Hotels & Accommodation (+92.5%), and General Retailers (+85.6%) saw some of the steepest increases in 'critical' distress over the last 12 months, reflecting subdued discretionary spending and the impact of sustained cost pressures.

Meanwhile, the number of businesses in 'significant' financial distress also continued to climb in 18 out of 22 sectors analysed, rising 14.8% year-on-year to 726,594 firms (Q3 2024: 632,756), following a 9.0% increase from 666,876 in Q2 2025. The picture in Hotels & Accommodation (+24.3%), Travel & Tourism (+14.2%), and Food & Beverages (+12.9%) is of particular concern.

Julie Palmer, Partner at Begbies Traynor, said:

"The steep increase in businesses in 'critical' financial distress shows the UK economy is in real trouble. With over 55,000 companies now in serious financial distress, the upcoming Budget must deliver urgent support to avoid a wave of failures, especially among SMEs already operating on a knife edge.

"Unfortunately for UK businesses, inflation is going nowhere, putting further pressure on companies at a time when wage, tax, and financing costs are already high. Many firms have no room to manoeuvre, and instead of investing for growth, are scaling back just to survive - the opposite of what the economy needs, if it's going to recover and grow.

"The Government must get the Budget in November right, but the Chancellor faces a delicate balancing act between delivering 'business friendly' measures while balancing the books. There has been a lot of temperature testing in the run up to November, but it is critical that the final measures are decisively pro-business.

"We are entering a critical phase. Consumer-facing sectors like retail, hospitality and leisure are already in deep distress and have little capacity to absorb further shocks or pressures on consumers, while many other industries are also treading water. Without meaningful support, we can expect more restructuring, rising insolvencies and a continued loss of economic confidence well into 2026."

Ric Traynor, Executive Chairman of Begbies Traynor, said:

"The sharp rise in critical financial distress in nearly every sector is particularly concerning. Over the last 12 months, we have seen a noticeable surge in the number of companies in serious financial trouble and there appears to be little light at the end of the tunnel.

"Many UK businesses are having to deal with a number of intense pressures, including rising geo-political uncertainty, tariffs, and the deteriorating economic situation in the UK, which is suffering from stubbornly high inflation, high taxation and high borrowing costs. With confidence and investment both subdued, the challenges for businesses remain substantial.

"Rising insolvencies, weak productivity and growing unemployment all point to a wider slowdown that is now becoming evident in almost every sector. With public finances stretched and Government borrowing running above forecast, the Chancellor faces very difficult decisions ahead of the Autumn Budget.

"Any measures that shift more of the burden onto businesses will only deepen the uncertainty facing them as they look ahead to 2026. Additionally, with consumer confidence so volatile, anything that increases the tax burden on individuals is likely to have a disastrous effect on consumer-facing industries like hospitality.

"Reducing inflation is proving to be challenging and it remains high enough to limit any meaningful reduction in interest rates in the near term. As a result, businesses are contending with sustained financial pressures from all sides and margins continue to be eroded. Many have already delayed investment or reduced headcount to preserve capital and it does not look like we will see small and medium businesses start to invest for growth again for some time.

"Many UK businesses will be desperate for some respite; however, I fear that without tangible policy support to ease the pressures they currently face, we are likely to see corporate distress and insolvencies continue to rise next year."

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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://www.begbies-traynorgroup.com/