With inflation rates continuing to climb, rapidly rising costs and declining demands, businesses are now facing a weakened economic environment whilst still bearing the financial burden of the pandemic.
During the third quarter of 2022, corporate insolvencies in England and Wales slightly declined to 5,595 with 1 in 213 active companies (at a rate of 46.9 per 10,000 active companies) entered liquidation between 1 October 2021 and 30 September 2022. This was an increase from the 29.3 per 10,000 active companies that entered liquidation in the 12 months ending 30 September 2021.
After seasonal adjustment, the number of company insolvencies in Q3 2022 was 1% lower than in Q2 2022 but remained 40% higher than in Q3 2021, driven by a historically high number of CVLs and an increase in compulsory liquidations.
While the Insolvency Statistics are backward looking, the ‘Red Flag Alert’ research published by Begbies Traynor Group looks forward by looking at the number of companies currently in financial distress.
The latest report, released mid-October, shows the number of companies in ‘critical financial distress’ continued to rise this quarter, jumping by an increase of 25% compared to the same period a year earlier. County Court Judgements (CCJ), an early warning sign of future insolvencies, were up by 28% against the previous quarter of 2022, with more CCJs being ruled within first nine months of 2022 than in the entirety of 2021 or 2020, and the second highest level for the first nine months of a year since 2010.
Winding Up Petitions, a more serious action lodged by creditors, were also increasing in Q3, reportedly 237% higher than the same period 2021, showing that companies are utilising aggressive legal enforcement measures to recoup debts.
In addition, it is reported that nearly 610,000 businesses are in significant (not critical) financial distress, representing an 8% year on year increase (Q3 22 v Q3 21) and a 4% quarter on quarter increase.
All this leads Julie Palmer, partner at Begbies Traynor, to warn that “After several years of volatility, the directors of businesses up and down the country are now facing very difficult decisions. They must decide whether to soldier on or give in, as they realise their businesses may not be viable if interest rates continue to rise as many economists expect.”
With inflationary pressures, increasing late payments reported and ongoing supply chain issues, we’ve seen Trade Credit insurers implement more rigid controls as they become more cautious of the most impacted industries. As a result, we also expect an increase in premium rates for Trade Credit insurance policies next year, especially where policyholders have had recent claims and losses. That said, Trade Credit insurers remain keen to take on new business and retain existing clients, with Atradius reporting high customer retention rates of 92.9% in a report issued earlier this year.
If you already have Trade Credit insurance in place, you will continue to have support to ride out the impending swell of insolvencies. Alternatively, if you are considering taking out Credit insurance, we advise getting this in place as soon as you can to get ahead of the insolvencies and avoid the predicted rate increases next year.
Contact The Channel Partnership if you have any queries related to the information covered in this post. And, for more tips on how to manage your business’s trade credit risk, you may find this blog useful.