No respite for SMEs despite economic recovery

Red Flag Alert Report for Q1 2014

• More than 200,000 SMEs in significant financial distress despite improving economic climate
• Access to funding remains a major hurdle as economic recovery brings over-trading risks
• New research released today by business recovery experts Begbies Traynor shows that small and medium-sized enterprises (SMEs) are being left behind as the UK recovery accelerates, with limited access to funding, the risk of over-trading and increased competition emerging as the biggest drags on growth.

The Q1 2014 Red Flag Alert reveals a 22% increase in the number of small businesses suffering from ‘significant’ financial distress compared with the equivalent period last year, offering a stark contrast with the fortunes of larger businesses, which enjoyed a 14% decline in distress levels over the same period.

According to the data, SMEs now account for 92%, or 207,505, of the 225,549 UK businesses facing ‘significant’ financial distress compared to 169,800 at the end of Q1 2013, when SMEs represented 89% of all businesses at ‘significant’ risk.

Small businesses in consumer facing sectors have fared worst over the twelve month period, with SMEs in the troubled bars and restaurants sector now making up 98% of that industry’s struggling businesses; significantly higher than the average of 92% seen across the entire economy today. Meanwhile the number of general retailers in ‘significant’ financial difficulty rose 16% year on year to 13,130, of which a significant 97% are classified as SMEs.

Julie Palmer, Partner at Begbies Traynor Group, said: “Given current market sentiment, today’s news may be a bitter pill to swallow for many, but the fact remains that a growing number of SMEs remain at significant risk of falling into distress and need greater support if they are going to turn their fortunes around.”

“In the worst performing industries such as retail, bars and restaurants, which are highly dependent on levels of consumer spending, smaller enterprises are simply unable to compete with the buying power of larger chains and have struggled to match the discounts offered by bigger competitors seeking to maintain market share.”

“Larger firms across the economy who have easy access to bank finance and years of experience on their side, have been able to take full advantage of the economic resurgence through measures such as extensive discounting, capacity expansion and increased marketing. However, as the recent Government consultation into SME financing shows, smaller businesses are far too often coming up against a brick wall when trying to secure vital funding for growth.”

“As the Red Flag analysis has identified in previous quarters, increasing order intake driven by the rebounding economy actually exacerbates this problem, as businesses run into working capital shortages caused by overtrading. The information gap between the banks and small businesses means that many SMEs are unaware of how to access alternative financing such as peer group lending and venture capital. Unless this is addressed soon we expect this upwards trend in SME distress to continue through 2014.”