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North East sees growing distress despite government support measures

Gillian Sayburn, partner at Begbies Traynor’s Newcastle upon Tyne office

Businesses across almost all sectors in the North East saw a marked increase in early signs of distress in the second quarter of 2020, despite the wide ranging support schemes implemented by the government to help combat the economic impact of the COVID-19 outbreak. With the courts closed during lockdown, the increase could be much higher given the lack of legal action on insolvent and distressed businesses.

According to the latest research from leading independent insolvency firm Begbies Traynor, 8% of businesses in the region were showing signs of ‘significant’ distress (those with minor CCJs of less than £5k filed against them or which have been identified by Red Flag’s proprietary credit risk scoring system) in the second quarter of the year compared with the same period in 2019. The firm’s quarterly Red Flag Alert data, which monitors the financial health of UK companies, shows that similar levels of this type of early distress was experienced across the country with year on year ‘significant’ distress rising by 9%.

While the government swiftly introduced a number of measures such as CBILS and the Job Retention Scheme aimed at providing short term support during the crisis, a number of sectors, particularly those which had been struggling prior to the pandemic, have seen their fortunes worsen. Real estate and property has been among the hardest hit with a 21% increase in the number of firms in the North East seeing ‘significant’ distress in the last three months compared with the same time last year. Other sectors in the region which have suffered are food and beverages (14% increase in ‘significant’ distress year on year); bars and restaurants (12% rise); hotels and support services (both up by 11%).

By the second quarter of 2020, the North East had a total of 10,444 ‘significantly’ distressed businesses, up by 4% on Q1 2020 and slightly higher than the UK-wide figure which showed a 3% rise, representing 527,000 businesses across the country. This type of distress is often viewed as a warning of more serious financial problems to follow.

Gillian Sayburn, partner at Begbies Traynor’s Newcastle upon Tyne office, said: “Unfortunately, what we’re currently seeing is very much the tip of the iceberg. In fact, the increase could actually be much higher as the closing of the courts during the pandemic is holding back a flood of businesses from falling deeper into financial distress. What’s more, with government initiatives currently propping up a large number of companies, we are expecting to see a marked increase in business failures in the third quarter of the year.

“While businesses in the North East and across the UK have found themselves facing an unprecedented situation and, in many cases, were simply unable to trade during lockdown, there’s no doubt that the preceding years of increased financial squeeze have had an impact on their resilience. For many, particularly in struggling sectors such as real estate, retail and hospitality, the COVID outbreak is likely to prove to be the final straw.”

She continues: “As government initiatives wind down and businesses cautiously attempt to re-open, those that have the capital and the ability, must restructure on the assumption that the world we now live in is here to stay. If they are to survive, they cannot afford to operate on hope that a return to normality is just around the corner. Businesses need to be prepared for things to get worse before they get better.”

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