Number of Scots firms on the brink soars amid 'debt storm' crunch

Hotels, food and drink, leisure and cultural activities, and construction among sectors particularly badly hit.

The number of Scottish firms on the brink of collapse jumped by more than a quarter in the closing months of 2023 as fears continue to grow over a “debt storm” caused by a string of interest rate hikes and rising costs.

There was a 25.9 per cent rise in levels of Scottish businesses seeing advanced or “critical” financial distress in the final quarter of the year compared with the previous three-month period, according to the findings of the latest Red Flag Alert from business rescue and recovery specialist Begbies Traynor. Compared with the same period in 2022, there was a 9.1 per cent increase in levels of severe distress in the closing quarter of last year.

The picture across the UK reflected the trends in Scotland with a similar quarter-on-quarter uplift in cases of critical distress, with almost 47,500 UK businesses now affected.

Many businesses have been hit hard by rising interest rates, soaring costs and a lack of consumer confidence, with increasing numbers calling it a day.

Ken Pattullo, managing partner for Begbies Traynor in Scotland, said: “It is concerning to see early and advanced distress in Scotland and, indeed, across the whole of the UK, continuing to climb. With no respite from high interest rates and rising costs, both businesses and consumers are struggling.

“Given the UK’s performance in recent years and with further ‘stagflation’ predicted, a technical recession remains a distinct possibility in the second half of 2024. This, together with a climate of global geo-political uncertainty, makes it more important than ever that businesses proceed with caution and seek advice from insolvency professionals at the first signs of trouble.”

Some sectors in Scotland were particularly badly hit in the final months of 2023 with printing and packaging seeing a quarter-on-quarter rise in critical distress of 150 per cent; hotels (+111 per cent); professional services (+49 per cent); food and drink (+40 per cent); leisure and cultural activities (+35 per cent); and construction (+31 per cent). Only two sectors in Scotland saw critical distress fall since the previous quarter - travel and tourism decreased by 23 per cent and utilities by 21 per cent.

Levels of advanced “significant” distress - businesses showing deterioration in key financial ratios and indicators including those measuring working capital, contingent liabilities, retained profits and net worth - also rose in Scotland, by 14.2 per cent quarter-on-quarter and 5.9 per cent year-on-year. More than 26,000 Scottish businesses suffered from significant distress in the fourth quarter of 2023.

Julie Palmer, a partner at Begbies Traynor, said: “Now that the era of cheap money is firmly a thing of the past, hundreds of thousands of businesses in the UK, who loaded up on affordable debt during those halcyon days, are now coming to terms with the added burden this will have on their finances.

“For some, a better-than-expected Christmas may kick these concerns down the road for a little longer, but the rapid growth in the levels of critical financial distress point to an economy that is waking up to the danger of debt laden businesses in a higher rates environment. Sadly, for tens of thousands of British businesses who should be looking ahead to 2024 with some degree of optimism, the new year will bring a fight for survival.”