Region’s smaller firms bearing the brunt of business distress

Yorkshire’s financial health has deteriorated over the past three months following a big increase in distress levels in the service sector, with smaller companies struggling to survive, according to the latest Red Flag Alert research from Begbies Traynor.

The total number of Yorkshire companies displaying “critical” problems rose by five per cent in the third quarter of this year compared with the previous quarter. This was much worse than the rest of the UK, which saw an average fall of two per cent.

The number of Yorkshire firms reporting “significant” problems shot up by 22 per cent to 13,575.

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The figures showed that small to medium sized enterprises (SMEs) in Yorkshire are increasingly bearing the brunt of business distress.

Begbies Traynor said their fortunes contrast starkly with an improving picture for larger companies and highlight the UK’s dual-track economy.

In Yorkshire, smaller companies accounted for 94 per cent of all distressed business across the region in the third quarter, one per cent more of the total than in the previous quarter, while business distress among larger organisations fell by the same rate.

Julian Pitts, regional managing partner for Begbies Traynor in Yorkshire, said: “Unfortunately, in Yorkshire as elsewhere, SMEs are still bearing the brunt as endemic late payments and higher costs of funding take their toll on smaller companies’ cash flows, thus adding further fuel to the fire of the UK zombie problem.

“Our statistics show that the SME community in Yorkshire and the UK generally needs swift action on late payments, reducing the regulatory burden and business rates, and improving funding availability.

“Without a rapid improvement in funding for the working capital and investment required to compete effectively with larger companies during the economic recovery, we could see an increase in insolvencies in the new year.”

On the plus side, overall levels of business distress were down year on year.

In Yorkshire, levels of “significant” distress were down by seven per cent in the third quarter of 2013 compared with the same quarter a year ago, from 14,661 to 13,575 businesses.

“Critical” distress levels dropped 36 per cent over the same period from 334 businesses last year to 214.

“That we have seen a rise of five per cent in critical distress in Yorkshire when compared to the UK average that saw a slight fall, is of course concerning, but despite this there are enough positive signs that the economy here is starting to pick up in some important sectors,” said Mr Pitts.

There were improvements in Yorkshire’s consumer facing industries, such as food and drugs retailing, which reported a 67 per cent fall in “critical” distress levels.

Sports and recreation companies reported an even better 86 per cent fall in “critical” distress levels.

The report said these improvements are masking a declining trend in less buoyant sectors in Yorkshire and across the UK as a whole.

These include the services industries, where “critical” problems have shown a significant increase in the third quarter of this year, with real estate and property services businesses displaying a 113 per cent upsurge compared to the second quarter of 2013.

Companies in the region’s professional services sector reported an 80 per cent increase in “critical” problems.

“It is welcome news that Yorkshire’s consumer-facing sectors have seen significant reductions in “critical” distress levels, both on a quarterly and annual basis, following a strong summer of sales aided by the extended period of good weather,” said Mr Pitts.

“With market sentiment improving and rising house prices giving home-owners increased confidence, consumer spending is proving to be the engine driving this recovery.

“This is good news for the consumer-facing sectors, which are so dependent on a positive Christmas trading period.”

However, with pay growth still lagging behind inflation, he warned that this consumer-led improvement could have worrying consequences for the wider economy as new research from the British Bankers’ Association suggests that this resurgence is being funded by a rise in household credit, which has increased for the first time in four years.

“With rising property values prompting still more consumers to increase borrowing, even amid fears of an imminent housing bubble, we are reminded of the boom years prior to the economic downturn of 2008, and hope that this is not a sign of UK consumers repeating past mistakes,” he said.