Construction tops ‘financial distress’ index

Construction has been named as the sector with the most firms facing “critical” financial pressure, with almost 6,000 businesses on the brink of bankruptcy.

The latest Red Flag Alert report from insolvency practitioner Begbies Traynor, covering the third quarter of 2023, said 5,919 construction companies across the UK were in “critical financial distress”.

The proportion of construction businesses in this category – which is “often a precursor to formal bankruptcy” – was up 46 per cent from the previous quarter.

Second and third on the critical distress list were support services (5,741) and real estate and property services (4,994).

Together, construction and real estate firms accounted for almost 30 per cent of all companies in critical financial distress amid the slowdown in the housing market, Begbies Traynor said.

There were 72,257 construction firms in the next most serious category, “significant financial distress” – up from 61,423 in the three months to the end of June.

Overall, the number of UK businesses in critical financial distress was 37,722 in the quarter, up by 24.9 per cent from the previous quarter.

Begbies Traynor said the rise came as the “pressure of higher interest rates, resilient inflation and weaker consumer confidence take their toll”.

Meanwhile, the number of companies in significant financial distress was 478,176 – an increase of 8.7 per cent.

The data is based on a credit-scoring system that incorporates factors such as working capital, contingent liabilities, retained profits and net worth.

Begbies Traynor partner Julie Palmer said the construction industry “looks particularly vulnerable”, pointing out that an assessment of critical financial distress was “often a precursor to formal insolvency”.

Commenting on the wider results, Palmer said: “Tens of thousands of British companies are now in financial dire straits now that the era of cheap money is firmly behind us.

“Businesses that had loaded up on debt at rock-bottom rates, and were only able to cling on during the pandemic thanks to government support, must now deal with a financial reality check as higher interest rates hit working capital for the foreseeable future.

“Taken together with stubbornly high inflation and weak consumer confidence, many of these businesses will inevitably head towards failure.”

Ric Traynor, Begbies Traynor’s executive chairman, commented: I am hopeful that stabilising inflation and interest rates will start to slow the rising levels of distress in the economy in due course, but history dictates that this will take some time, and insolvencies often peak long after a recovery has started. Unfortunately for many businesses, time is not on their side.”

He added: “The outlook remains pretty bleak, and I expect many more ‘zombie’ companies to continue to fail for some time to come as the impact of this economic backdrop makes them increasingly unviable.”

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