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Sharp rise in advanced financial distress among businesses in Scotland

There has been a marked increase in advanced financial distress among firms in Scotland.

The number of Scottish firms experiencing advanced financial distress as the pressures of the pandemic took their toll leapt in the third quarter of the year, according to new research.

Companies in the hospitality sector were hit worst, the latest Red Flag Alert data, published by independent business rescue and recovery specialist Begbies Traynor, found.

The figures revealed that, for the three months to September, ‘critical’ distress in Scotland was up by 50% on the previous quarter, compared with a 17% increase across the rest of the UK.

Critical distress refers to businesses that have had winding up petitions or decrees totalling more than £5,000 against them.

However, levels in Scotland have fallen by 22% compared with the same period the previous year and by 3% year on year across the UK.

The latest figures show that for many businesses, particularly those in the hospitality industry, the disruption of Covid restrictions and repeated lockdowns over the last two years, have simply proved too big a burden for them to bear.”

Ken Pattullo, Begbies Traynor

In contrast, Scotland, along with the rest of the country, has seen a sharp fall in ‘significant’ or early-stage distress as the economy showed signs of recovery following the relaxation of Covid regulations this summer.

There was a 15% decline in the number of ‘significantly’ distressed businesses in the country compared to the second quarter of 2021.

But, the figures also showed that there had only been a minimal fall of just 1% in the number of companies in significant distress compared with the same period the previous year, before last winter’s restrictions and lockdown were imposed.

More than 28,000 firms showing distress symptoms

The new data shows that a total of more than 28,000 firms in Scotland were displaying symptoms of significant financial distress in the third quarter of 2021.

Significant distress refers to companies that have financial problems such as minor decrees of less than £5,000 filed against them.

Across the UK as a whole, there was a 14% fall in significant distress compared to the previous quarter, and a 1% increase year-on-year.

In Scotland, the sectors which saw the sharpest decline in significant distress quarter-on-quarter were food and drug retailers, down by 23%; financial services and professional services, which both fell by 18%; and telecommunications where there was a 17% reduction.

In contrast, the hospitality sector is continuing to struggle, with instances of advanced or critical distress particularly marked in leisure and cultural activities, where the figure was up by 57% since the second quarter of this year.

Among bars and restaurants there was a 48% rise, while in the travel and tourism and hotels and accommodation sectors there were increases of 42% and 31% respectively.

Ken Pattullo, of Begbies Traynor.

Ken Pattullo, partner for Begbies Traynor in Scotland, said: “The latest figures show that for many businesses, particularly those in the hospitality industry, the disruption of Covid restrictions and repeated lockdowns over the last two years, have simply proved too big a burden for them to bear.

“However, it is encouraging to see falling levels of early distress since the previous quarter indicating that some are starting to recovery following the easing of the restrictions.

“There’s no doubt that the impact of the pandemic and Brexit is continuing to take its toll on businesses which are now facing an onslaught of new challenges.

“With lack of raw materials and labour as well as severe driver shortages and escalating fuel charges pushing up costs, consumers are likely to bear the brunt of rising prices too.

“All these pressures are being heaped on businesses at a time when government support measures are being withdrawn and many are also having to start re-paying loans.”

Mr Pattullo continued: “While the hope is that after all the disruption, a post-pandemic economic recovery is not far away, there is real concern that the perfect storm of complex issues, including supply chain disruption, will not be resolved by the government in time to save many beleaguered small businesses.

“Any directors of struggling firms should seek professional help as soon as possible before their situation worsens.”

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