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SME risk levels on the rise 22 July 2014

UK businesses have experienced a 34% increase in levels of ‘significant financial distress’, according to the latest Begbies Traynor Red Flag Alert.

There were 237,361 UK businesses in ‘significant’ distress in Q2 2014, up from 176,766 in the same period the year previously, and marking the third consecutive quarterly rise in distress levels.

Of those 237,361 businesses, 217,855 were classed as SMEs – this represents a 40% increase from the 155,253 in 2013.

However, the number of businesses experiencing ‘critical’ financial distress fell by 9% year-on-year, to 2,745.

Julie Palmer, partner at Begbies Traynor, said: “Despite rising distress levels, SMEs are more optimistic than ever about their outlook and as such they are expected to fuel job creation over the coming year.

“While this is a positive sign that SMEs are preparing for growth, without funding and careful financial planning this will only increase their business’ cost base; one of the principal causes of severe ‘critical’ distress within the SME community.

“Access to funding is still a major issue for a huge number of UK SMEs. Although traditional bank finance is now widely available for those firms fortunate enough to comply with mainstream lending criteria, it remains a different story for businesses in complex or challenged circumstances.”

Interest rates are generally expected to rise as early as November, and Begbies Traynor says a rise of even 1% could have severe impact on SMEs experiencing financial distress, especially those with debts accumulated during the recession.

Palmer said: “Our latest Red Flag findings once again underline the critical importance for current government initiatives to increase the diversity of funding providers and to better signpost alternative business finance.

“It is crucially important that Mark Carney exercises tightrope precision in his decision on the timing of interest rates rises if he wants the UK to return to more normalised conditions, without initiating an emergency stop on its economic recovery.”

Begbies Traynor Group chairman Ric Traynor believes that while larger businesses have taken advantage of market opportunities, many SMEs risk being overwhelmed.

Traynor said: “The UK needs SMEs to be able to take on new orders, recruit staff and invest in growth if they are going to contribute to the broad-based economic recovery. But without adequate funding in place, this kind of investment can only be achieved by overstretching their finances, leaving them little leeway should things take a turn for the worse or if growth accelerates leading to greater working capital needs – a risky strategy at a time of growing political and monetary policy uncertainty.”

The sectors with the highest increases in ‘critical problems’ year-on-year were the professional services (30%), travel and tourism (28%), and food and beverage manufacturing sectors (21), while the hotel, utilities, and wholesaling sectors saw decreases of 49%, 38%, and 25% respectively.

Regionally, Wales saw the greatest fall in ‘critical problem’ levels year-on-year (26%) while Scotland was the only region of the UK to experience an increase (22%).

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