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COVID‐19 will cause unpaid business debt to double to £8.6 BILLION

Apr 09, 2022 Red Flag Alert Updated On: August 17, 2023
COVID‐19 will cause unpaid business debt to double to £8.6 BILLION
    • Disruption caused by coronavirus will mean companies have to write‐off £8.6bn in unpaid invoices in 2021
    • Bad debt will peak again in 2021 with companies facing a total of £24bn in write‐offs
    • Long tail effect of debt will see companies affected by the pandemic continuing to go out of business in the next 18 months
    • Professional services and construction most at risk of insolvent debt
    Economic disruption caused by COVID‐19 will see unpaid business debt double to more than £8.6bn this year after the insolvency lockdown lag.

    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 £8.6billion this year and we could see levels of bad corporate debt in 2021 rising beyond £15billion.

    “As a conservative estimate, this would mean companies have to contend with almost £24billion 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.”

    Halstead advises businesses to protect themselves against insolvent debt by tightening‐up their creditor services and regularly health‐checking the financial performance of the companies they deal with.

    He concludes: “Debt can have an immediate impact on the security and operation of a company. This will be accelerated as insolvent debt rapidly increases. Businesses may find that customers and suppliers which were in a good shape just weeks ago, are now facing collapse. Spotting the early signs of their difficulties can prove the difference between adjusting payment terms, avoiding incurring further financial losses and finding alternative sources of supply.”

    Top 10 sectors that suffered unpaid debt in 2019 (Red Flag Alert data):

    Sector Sum of Total Insolvent Amount
    Professional Services £1,390,142,335.85
    Construction     £753,766,475.68
    Support Services £636,588,814.23
    General Retailers £505,205,123.31
    Real Estate & Property Services £184,102,808.24
    Wholesale £119,971,301.12
    Travel & Tourism £95,081,449.70
    Other Manufacturing £86,014,156.98
    Automotive £82,340,554.81   
    Industrial Transportation & Logistics £81,877,024.48

    *The Insolvency Service’s company insolvency statistics, Q4 October to December 2019, show that in 2019 there were 17,196 company insolvencies:

    • Compulsory liquidations: 2,970
    • CVLs: 12,060
    • Administrations: 1,814
    • CVAs: 351
    • Receiverships: 1

    Red Flag Alert is a business intelligence solution that provides real‐time data on every UK and Northern Ireland business.

    Red Flag Alert allows you to effectively assess the financial health of a business with detailed business reports, monitor any changes in circumstances in a business through real‐time e‐mail alerts, and identify and target your ideal business prospects through an online search function with options for basic and advanced business demographics search. Click here to start a free trial and start protecting your business today!

Published by Red Flag Alert April 9, 2022

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