ThinCats warns low insolvency headline rates should be treated with caution
ThinCats, the leading alternative finance provider to mid-sized SMEs, has today released a report on the impact of covid on business insolvency rates. An analysis of UK mid-sized SMEs : Where next for insolvency rates? assesses whether the historic low insolvency rates recorded in 2020 are disguising the true health of medium sized businesses and the prospects for increases in insolvencies as government support schemes, such as furlough, come to an end.
In 2020, the official insolvency rate across approximately 425,000 mid-sized UK companies was 0.61% (circa 2600). This compares with a peak of 1.86% (circa 5400) during the Global Financial Crisis in 2009 and is lower than both the pre-GFC level of 0.81% in 2007 and the pre-Covid level of 0.76% (circa 1950) in 2019.
Insolvency rates of UK businesses £0.5m gross assets
This would suggest that throughout the pandemic, the support packages provided by government such as business interruption loans, VAT deferrals and business rate holidays, have prevented – or at least deferred – insolvency for many firms in this size bracket.
However, while the overall insolvency rate fell between 2019 and 2020, data from the Insolvency Service reveals the largest value of pay outs for 10 years in missing wages and benefits at companies that went bankrupt last year.
The report suggests larger businesses are suffering higher insolvency rates while smaller companies are showing greater resilience. ThinCats’ analysis shows companies at the larger end of the mid-sized population, with £10 million or more in gross assets, saw an increase in insolvency rates in 2020 while the remainder trended downwards in line with the overall rate.
While most sectors are generally seeing a downward trend in insolvencies, unsurprisingly, there are three sectors seeing an upward trend. ‘Consumer Services’ (including hairdressers, travel agents and repair shops), ‘Food & Accommodation’ and ‘Arts, Entertainment and Recreation’.
Although large businesses reliant on high footfall make up only a small population in numerical terms, these businesses experienced the sharpest rise in insolvency rates in 2020. The rate for this segment was already on an upward trajectory starting in 2017, but it doubled from 0.76% in 2019 to 1.52% in 2020. In contrast, smaller businesses reliant on high footfall have remained on a more gradual path of rising insolvencies stretching back to 2016 with insolvency rates increasing by 20% in 2020.
The report also poses the question of the future for “zombie” businesses, those that are only viable while the current government support continues. While the eventual withdrawal of government support is inevitable, a question remains around whether new customer habits developed during the pandemic are here to stay – particularly the increase in online sales, and the knock-on effect that a continued exodus from the high street will have on town centres across the country.
Ravi Anand, ThinCats managing director: “While the impact of Covid on businesses that rely on customer footfall wasn’t a surprise, we hadn’t expected large companies to be proportionally hardest hit. It may be that some of the larger multi-chain businesses have not responded as quickly to longer-term threats such as online sales.”
“As a lender, it’s important to understand the challenges facing companies especially as the economy begins to open up and Government support schemes come to an end. There are a lot of businesses, particularly in the services and tech sector, that have done really well. In contrast, there are also many businesses that are sound but will take a bit of time to rebuild working capital as the economy opens up, while businesses that didn’t adapt, even before Covid, have been left exposed.”
“Using our proprietary PRISM credit model, we will be analysing the performance of every mid-sized SME as they start to report their financial performance since the start of the pandemic. This information will provide greater insight as to the real financial health of the mid-sized sector, which will play a key role in delivering much of the expected economic growth as we enter the post-Covid era.”