With businesses across the UK facing ever-increasing pressure, the prominence of distressed businesses is on the rise. From economic uncertainty to geopolitical disruptions and tightening credit conditions - the landscape is constantly becoming more and more complex, meaning there’s a need for more careful planning when it comes to navigating difficult situations.
For many businesses in distress, it’s easy to fall into the trap of making rash decisions and achieving a less-than-favourable outcome. To avoid that, it’s vital to identify problems and act early. In this article, we’re exploring the nature of business distress across the UK, and providing an intuitive guide on how to navigate the challenges and capitalise on unique opportunities…
Businesses are facing rising economic pressures
Rising costs and financial pressures are creating uncertainty for businesses from a number of angles:
- Higher interest rates are making borrowing more expensive
Currently, the Bank of England’s base rate is standing firm at 4.5%. Because of the persistent inflationary pressures, it’s difficult to see any significant reduction in the near future. This means that many businesses who may have previously relied on low-interest debt to finance their growth and operations are now faced with higher repayment costs, creating greater financial strain.
- Employment costs are being driven upwards
With the rise in employer National Insurance Contributions (NICs) and increases to the National Minimum Wage and Living Wage, businesses are experiencing a surge in employment and workforce costs, particularly in sectors such as hospitality, retail, and social care.
- Inflation is creating a challenging environment
Despite a dip from its initial peak, inflation is continuing to rise again, creeping back up to 3%, driving even further costs for businesses across their supply chains.
But there’s more at play than just costs in relation to finances. Particularly recently, there has been a significant shift in consumer and market dynamics:
- Consumer confidence is weakening
With stretched household budgets, consumers are being more discretionary with their spending habits. For customer-facing businesses in sectors such as retail, hospitality, and leisure services, this reduced spending and demand means declining revenues.
- Tariffs and trade barriers are limiting market access
Post-Brexit trading conditions combined with global supply chain disruptions and rising inflation are having a distinct impact on import and export costs. This means even more financial strain for businesses where international supply chains form part of their operations.
Touching on global matters, a multitude of global and political disruptions are also introducing a wide range of challenges for businesses:
- Geopolitical events are creating further financial strain, as well as logistical challenges
With the war in Ukraine driving up global energy and food prices, businesses are still developing strategies to manage these difficulties. But other global events are also creating issues. For example, attacks on shipping routes in the Suez Canal by Houthi rebels have had a significant impact on global freight transport, leading to a 50% reduction in shipping traffic and a notable increase in costs and delays. These delays within supply chains are introducing a wealth of challenges to industries and businesses reliant on just-in-time manufacturing and global distribution networks.
The UK itself is also witnessing a number of further changes as businesses begin looking ahead to the 2025 Autumn Budget for potential relief, or to prepare for further challenges. But in the meantime, HMRC is taking a more aggressive, hardened stance on debt recovery, leading to an increase in winding-up petitions against businesses with overdue tax liabilities. At the same time, creditors are becoming more cautious, with lenders and suppliers focusing on building cash reserves and insulating themselves from financial risk, making it more difficult for businesses to access credit or extend their payment terms.
The rise in business financial distress
Recent data has shown a significant increase in businesses facing financial distress. This stress can be broken down into two categories - ‘critical’ and ‘significant’.
For ‘critical’ financial distress, there has been a 50.2% quarter-on-quarter rise in businesses in this position, affecting 46,853 companies in total. Almost all sectors (21 out of 22) have seen an increase, with the worst-hit industries being hotels and accommodation (+83.6%), leisure and cultural activities (+76.5%), and general retailers (+47.6%). This highlights that businesses operating on low margins and those most-affected by the NIC and minimum wage increases are facing the most financial distress.
For ‘significant’ financial distress, there has been a 3.5% increase in Q1 vs Q3 2024, with a total of 654,765 UK businesses now being classified as being in this position. The most affected sectors in this classification looks a little different to the above, with construction (97,603 businesses), support services (90,375 businesses), and real estate and property services (75,394 businesses) being the most severe. The businesses in ‘significant’ financial distress typically rely heavily on financing, and are likely struggling to absorb the increased borrowing costs and supply chain inflation.
How to manage distress from a legal and strategic perspective
Effectively navigating distress in business can feel overwhelming. But a tremendous part of achieving a successful outcome involves developing a firm understanding of your situations, and your options.
- Directors’ Duties
If a business finds itself in financial distress, it’s crucial to understand that the responsibilities of directors shift towards creditors, rather than shareholders. It’s essential for directors to act responsibly, as if not, then that can lead to personal liability for wrongful trading or misfeasance as well as face potential director’s disqualification. With that in mind, it’s best to intervene as early as possible. With the right professional advice, directors can begin to address insolvency risks before they escalate, helping to mitigate any personal exposure.
- Refinancing and alternative funding
Mainstream funding has long been a complex and difficult source to acquire for SMEs, but even more so now that traditional banks are tightening their lending criteria. But alternative options are available, including challenger banks, bridge funding, and private equity. To increase the chances of success, it’s important to have a robust financial plan in place. At Clarion, we have an excellent network of alternative funding providers, and can provide professional legal support and advice to help you navigate the difficult nature of securing funding.
- Operational restructuring and cost optimisation
For many large businesses in the UK, a focus has emerged around ‘right-sizing’ operations. This has become an emphasised element of strategies in order to help align the business with the current market conditions. This often includes reducing costs whilst simultaneously improving efficiency, and a large number of businesses are exploring employment and workforce cost restructuring as a key part of this, including the use of AI and automation. For businesses looking to optimise their workforce and employment costs, our Employment team are here to help - get in touch with our team of expert lawyers to find out more about how we can support you through the process and ensure that you remain compliant.
- Contract management and litigation
Unprofitable contracts are a perpetual source of damage in situations of financial distress. This leads to a number of businesses actively looking for ways to exit those contracts. For those exploring their options in this area, it’s vital to think about renegotiation where possible, so that contracts can be drafted with more favourable terms. But where this isn’t a possibility, businesses can approach with litigation to either challenge or exit unfavourable agreements. On the other hand, businesses can also lock in suppliers or customers with contracts to maintain business stability. We understand that contracts and negotiations can be complex, but we can help - get in touch with us to find out more.
Capitalising on opportunities
Perhaps most importantly of all, it’s important to understand that financial distress doesn’t always mean insolvency. As we mentioned earlier, approaching situations at the outset and intervening early means businesses are likely to open up a lot more doors when it comes to the options available to them.
Because effective intervention means taking the right legal, financial, and operational strategies, and if you seek legal guidance early, you can gain a greater element of control over outcomes whilst protecting directors and positioning the business for a more successful recovery or restructure.
And for those entrepreneurial businesses that may be holding cash reserves, it’s important to begin identifying strategic acquisition opportunities, as distressed mergers and acquisitions are likely to see increased activity with businesses looking to acquire distressed assets at reduced valuations.
To find out more about how we can help you and your business, please don’t hesitate to get in touch with us.