Economic disruption caused by COVID-19 will see unpaid business debt double to more than £8.6bn this year.
According to The Insolvency Service over 17,000 companies went out of business in 2019, with analysis by financial risk firm Red Flag Alert showing this meant £4.3bn of invoices were written-off.
Based on Red Flag Alert’s financial modelling of insolvent debt over the past three years, this level of bad debt will spike during the coronavirus lockdown and rise further in 2021.
Mark Halstead, a partner at Red Flag Alert, explains: “Before the coronavirus outbreak hit the UK, our data shows there were 490,000 UK businesses in significant financial distress. These are companies run with poor fiscal management and at high-risk of failure from any short-term drop in revenue and cashflow.
“Typically, based on analysis from the past three years, around 3% to 4% of these struggling businesses will fail each year. The economic impact of COVID-19 will see this rate of failure rise substantially, reaching well into double figures. This will leave a trail of insolvent debt totalling £8.6bn this year and could see levels of bad corporate debt in 2021 rising beyond £15bn.
“As a conservative estimate, this would mean companies have to contend with almost £24bn in unpaid bills between now and the end of next year.”
Halstead pinpoints the long tail effect of insolvent debt as a bigger risk to companies than the initial slowing of trade during the UK lockdown and companies adapting to the COVID-19 pandemic. He believes some of this will be mitigated by Government coronavirus support measures such as the Job Retention Scheme and Business Interruption Loans.
He continues: “Unpaid debt ripple effects through supply chains, meaning that one large company going out of business will financially affect hundreds of other companies. This will prolong the impact of corporate insolvencies, causing another peak in insolvent corporate debt and business failures in about 12 to 18 months’ time.
“This peak in 2021 will also be driven by the pandemic leading to more robust due diligence and restricted lending. As a result, poorly managed companies will be unable to default to the tactic of borrowing their way out of trouble. Government support will prevent some of these company insolvencies this year, but it’s unfeasible for such support to continue in the long-term.
“Many failing companies this year and in 2021 will wholly blame coronavirus, but the reality is that the pandemic will be used to mask poor leadership, decision making and financial management.”