Distress signals coming from many SMEs, claims research

Thirty seven per cent of small businesses are experiencing decreased profits, compared to 19 per cent of medium-sized businesses and seven per cent of large businesses, insolvency trade body R3’s business distress index found.

Robert Adamson, chair of R3 in Yorkshire and northern head of restructuring services at Mazars, said: “Small businesses are likely to be struggling because they typically have less access to capital.

“They are also more vulnerable to any change in circumstances, such as a loss of a major customer or increased pressure from their creditors. SMEs are not able to diversify quickly enough to change their business in response to such events and typically do not benefit from adequate financial resources to restructure. Large businesses have the tools to relocate or cut head count for example. For this reason, it is not surprising that the one area large businesses are experiencing higher levels of distress is in making redundancies.”

The index also found that although 34 per cent of businesses in Yorkshire and the Humber are experiencing decreased profits, close to the national average of 33 per cent, there are indications that they are faring better than those in other parts of the country.

Three per cent of businesses in Yorkshire and the Humber are regularly using their maximum overdraft facility compared with 20 per cent nationally; and 19 per cent in the region have seen reduction in sales volume rather than the national average of 31 per cent.

R3’s latest research also shows that nearly half of businesses nationally report no distress signs at all. This level is even higher in the region at 63 per cent.

Mr Adamson said: “It is encouraging that half of businesses in the UK are not in a distressed situation – a large improvement from the report’s inception in 2010 when only a quarter of businesses could say that.

“However, what is of most concern is the businesses that have existed in a distressed situation for some time and are likely to have reported distress signs throughout the year. The fate of these businesses will have a major impact on the UK’s economy.

“If creditors become more rigorous in their pursuit of debts owed to them there is likely to be a sharp rise in business failure. This may clear the ground for a quicker return to growth and free up capital for other more viable businesses.

“However, if major creditors continue forbearance we could see a continuous period of low growth.”

Throughout the three waves of the distress index in 2012 the number of businesses in the UK experiencing distress signs has fluctuated only a few percentage points.

BDRC Continental conducted 501 telephone interviews with business owners and financial directors to compile the data.