27 August 2021

Lockdown-easing Helps SMEs Recover Despite Rising Insolvencies - Business Distress Index

Small to medium-sized businesses (SMEs) across England and Wales are fighting back after Covid-19 lockdowns, according to the latest Business Distress Index which looks at how the economy fared in Q2 this year.

Recently released Q2 insolvency and business distress figures, which focus on the three-month period April to June, demonstrate a real change of fortunes for most UK SMEs thanks in no small part to the national lockdown restrictions easing on April 12.

The total figure of SME businesses in distress in Q2 stands at 643,500 which represents a 9.75% decrease on Q1 - the first time we've seen a quarterly decrease since before the pandemic hit the UK in early 2020.

In total, 69,500 SMEs moved out of significant distress in Q2, highlighting the effect of the government's Covid-19 roadmap out of lockdown which saw so many businesses re-opening their doors in April.

How many businesses went into insolvency in Q2 2021?
However, the Q2 figures represent a bittersweet picture with business insolvency on the rise. In total, there were 3,116 company insolvencies in Q2 which represents a 31% increase vs Q1 figures (2,371 insolvencies) and is also the highest quarterly insolvency figure since before the pandemic began.

How has lifting Covid restrictions impacted businesses?
The overall picture is positive with 69,500 SMEs out of significant distress and decreasing levels of regional distress.

In fact - since many UK businesses re-opened in April - we've seen a drop in significant distress across all regions. Our figures for Q2 show that London has seen the smallest drop in significant distress with an 8.8% decrease, whilst Northern Ireland has seen the biggest drop in significant distress with a 15.1% decrease.

London is still the UK region with the most SMEs in distress (171,319) but that figure has dropped from 187,744 in Q1.

There's good news in terms of jobs, too. The figures for Q2 show that 3million SME jobs are now in danger which represents a 6% decrease vs Q1 where 3.2million SME jobs were at risk. Again, the lockdown easing has played a major part in stabilising the UK economy and specific sectors have benefitted more than others.

Manufacturing is the biggest winner with jobs in danger dropping by 9.8% vs Q1 - a total of 21,890 jobs. The Support Services sector saw the most amount of jobs move out of danger with a total of 44,822 (an 8% decrease vs Q1).

With the overall picture looking healthier for SMEs, why are insolvencies rising?

Shaun Barton, National Online Business Operations Director at Real Business Rescue, commented:

"This Q2 data represents a different story to what we've seen in the last 18 months; portraying a brighter picture with distress levels decreasing thanks largely to lockdown-easing in April and trade resuming for many businesses.

"But while that's positive, there's two stories to tell here. The second being that corporate insolvencies (companies entering into insolvent liquidation) are on the rise which seems to contradict the overall picture of positivity, but we feel there's a reason for this.

"While many businesses opened their doors in April and started getting back on their feet, this led to a decrease in levels of significant distress levels. But some businesses quickly realised they couldn't manage the accrued liabilities over the previous 12-15 months. Many SMEs saw arrears building up throughout the pandemic such as landlord and rent payments, VAT, PAYE, and on top of this we saw Bounce Back Loan repayments beginning in Q2 as well. You can understand why an increasing number of SMEs were simply unable to cope with the heightened cash flow pressure upon re-opening which has led to a rise in voluntary liquidation processes.

"So the overall picture is healthier with the caveat that some businesses, that just about kept their heads above water throughout the pandemic, are now starting to fall away."

Source: The Business Distress Index Q2 2021