Financial pressures are continuing to drive business failures, with the hospitality sector most vulnerable to stubbornly high inflation, says a restructuring and recovery specialist.

The warning comes as new monthly insolvency statistics for June 2023 reveal there were 2,163 company insolvencies, 27% higher than in the same month in the previous year (1,698 in June 2022) and higher than pre-pandemic numbers.

There were 260 compulsory liquidations in June 2023, 77% higher than in June 2022, and 1,759 creditors’ voluntary liquidations (CVLs), 21% higher than in June 2022. Administrations and company voluntary arrangements (CVAs) were also higher than in June 2022.

Chris Tate, a restructuring partner at UK top 10 accountancy firm Azets, says Britain’s inflationary environment is causing a ‘perfect storm to brew’– with the soaring cost of borrowing making matters worse.

He said: “The cost of living crisis isn’t going to get any better soon. High inflation appears to be baked in, with the cost of supplies unlikely to be lowering in the near future and the continued rise of interest rates compounding cash-flow pressures as debt repayments increase substantially compared to previous years.”

According to government figures, there are 143,000 businesses in the hospitality sector, employing 1.8 million people. Many will now find themselves struggling to make any sort of profit following the tough pandemic years.

Mr Tate added: “To drill down further, we are already seeing this in the fish and chip industry – the cost of packaging, fish, potatoes, labour, higher VAT bills and energy, with less spending money from hard-pressed customers, are hurting.

“We’ve already had a related enquiry which shows this particular business model is, frankly, broken. Unless the government take action akin to the temporary VAT reduction during the pandemic, soon, many more similar businesses will unfortunately hit the wall.”

Mr Tate called for concerned business owners to seek professional advice at the earliest opportunity if losses in the weekly and monthly accounts start mounting.

Fintech fears

The UK’s fintech sector faces an uncertain future, with many flagging the potential risk of failure by the end of 2023, according to new research commissioned by specialist business advisory firm FRP. 

FRP found that 40% of Scottish businesses in the sector were not confident of their ability to trade through the next six months, as challenges relating to inflation and interest rates persist.

However, this was the lowest proportion of the UK regions and nations surveyed, which also included fintech clusters in the Midlands (58%), the North East (Newcastle and Durham, 56%), in London (46%) and the North (Leeds and Manchester, 42%).

The fears are likely to be linked to challenging trading conditions, with just over a quarter (26%) seeing the valuation of their business fall over the past 12 months, as they continued to contend with rising input costs – the highest proportion recorded. Over a third (34%) also expect their valuation to decline over the next year.

With a high proportion of firms concerned about their futures, the research highlights a polarisation in the market in terms of funding – suggesting a fight for quality among venture capitalists and lenders.

Against a backdrop of rising interest rates, nearly two in five firms (36%) have found funding harder to come by over the past 12 months, with just over two in five (44%) accessing finance with greater ease.

This polarisation is also apparent in firms’ plans for the future. Seven in ten (70%) of the business leaders FRP polled said that they had reviewed and amended their exit strategy in the past year. The most popular option was planning to seek new funding or investment (46%), followed jointly by seeking new consolidation or acquisition opportunities (40%).

Michelle Elliot, partner and restructuring specialist at FRP in Glasgow, said: “There’s no denying that fintech firms in Scotland are clearly finding some aspects of life challenging.

“While many have struggled to grow in the last year and, for many, it’s proving harder to source funding, we can take heart from the resilience that firms are showing in the face of these conditions. It’s still concerning that two in five worry about their ability to trade through the next six months but that’s the lowest proportion in the UK. That spirit of enterprise and ambition gives me confidence for the future.

“For those targeting further investment or consolidatory support, the coming months will be crucial in optimising their commercial operations and future profitability to develop the best proposition.”