StockMarketWire.com - Nearly half a million businesses across the UK are in a state of 'significant' financial distress, even before the effects of a potential interest rate hike are felt, according to Begbies Traynor's latest Red Flag research.

The research showed that 448,011 businesses were experiencing 'significant' levels of financial distress at the end of the third quarter, up 27% on a year ago.

It said almost 250,000 of these companies (Q3 2107: 248,619) ended the period with negative net worth, representing a sizeable population of so called "zombie" companies that had managed to survive thanks to the prolonged low interest rate environment and flexible labour market, but which did not have adequate working capital to fund any growth or absorb rising input prices.

Begbies Traynor warned that with the prospect of an interest rate rise alongside increasing employment costs, due to changes in the minimum wage combined with HMRC's crackdown on personal service companies (often set up to avoid employers' national insurance), many of these struggling companies would not have the reserves available to survive.

The research also showed that 'significant' financial distress rose across every sector and region of the UK over the past year, with the professional and financial services sectors being worst affected, increasing 42% to 26,113 and 34% to 11,079 struggling businesses respectively.

Geographically, the worst performing region of the UK by volume was London, where 107,896 companies ended the period in a state of 'significant' financial distress, an increase of 6% year on year; representing nearly a quarter of all UK businesses in distress.

Begbies Traynor partner Julie Palmer said: 'The number of firms experiencing 'significant' financial distress has reached unprecedented levels over the past 12 months, as businesses in search of growth have overstretched themselves, taking too many risks after being lulled into a false sense of security by the continued low interest rate environment.

'Following a spate of downbeat economic updates, showing everything from rising inflation and increasing corporate insolvencies to slumping retail sales and the further decline of the UK's vital construction sector, our data shows that no segment of the economy has ended the period unscathed.

'With consumers continuing to borrow using credit cards, personal loans and car finance at a rate almost five times faster than their growth in earnings, my biggest concern is on the UK's ever-expanding consumer credit bubble, which could burst at any minute, knocking the consumer industries and financial sector for six.

'While the prospect of an interest rate increase will of course go some way to addressing this, the knock-on effect for many struggling businesses with high levels of debt could be severe.'

Executive chairman Ric Traynor added: 'Despite the IMF slashing the UK's economic growth outlook on account of the weak pound and spiking inflation, UK GDP has continued to increase ahead of expectations over the past three months.

'With this representing the 19th consecutive quarter of GDP growth, the prospect of an interest rate hike this week seems all the more likely, which will be worrying news for many firms who have been relying on low rates to keep their heads above water.

'Regardless of whether interest rates rise or fall on Thursday, there is also a distinct trend emerging among personal services companies, who seem to be contributing more than their fair share of distress across multiple sectors of the economy.

'Following HMRC's crackdown on these businesses, many personal service companies are finding trading conditions particularly tough under the new regime.

'As a result, it is likely that we will see a trend of increasing insolvencies among this group, putting added pressure and costs on the larger companies and sectors that they serve.'





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