Year-on-year, there was a 40 per cent spike in company failures. For context, while we know that insolvencies fell significantly during the pandemic as many businesses took on Government-backed loans, we are now beginning to play catch up as many of the businesses supported through Covid are now failing as they now combat economic headwinds.
This does feel somewhat gloomy. Yet, it’s important to note that if you look closer at the numbers, it does provide a more nuanced picture.
Companies come in all different shapes and sizes – and while some aren’t faring well, others are doing much better. For example, if you separate the health of small businesses compared to mid-sized businesses, then you immediately begin to see the resilience of the larger cohort.
Likewise, some sectors are struggling, notably in retail and construction, but others are doing much better. The service sector has shown remarkable resilience and is expanding. Many businesses that I speak to across the region pursuing a buy-and-build strategy still have an appetite to expand.
However, the biggest change over the past couple of years has been the rising cost of debt. The Bank of England has increased the Base Rate to 5 per cent for the first time since 2008. Forecasts suggest that it will increase before it comes down any time soon. What does this mean for businesses in the region?
For a start, the rising cost of borrowing has changed the debt structure many businesses are using. This in turn limits the amount of debt they’re able to take on, understandably limited liquidity has limited applications. Decision-making is taking longer, and the pace of activity has slowed as a result. Many larger lenders may also begin to squeeze the availability of credit too.
Yet, I think it’s important to note again that this doesn’t apply to all businesses. Despite some negative headlines, business and consumer confidence have improved in recent months.
Some sectors have been more resilient to this rise in costs than others, for example, professional services companies historically have higher margins and so have been able to absorb the increased cost of debt. We do a lot of lending to asset-light businesses, such as accountants, financial planners or marketing companies. These types of businesses have strong recurring revenues where profits are often 25 per cent and quite often higher. Yes, the cost of borrowing is more expensive than it was six months ago, but if their ambition is to expand, then a marginal increase in borrowing costs is not going to push them over the edge.
Over the next six months, medium-sized businesses need to be prepared to roll with the waves. There are undoubtedly going to be pressures and difficulties, but there will also be opportunities. I’d advise any business concerned about the future to speak to their advisors. For example, if they have plans to expand through acquisition, there are deals to be had out there.
This management of risk should form the key to a business’s strategy in the medium term. But while mitigating risk is important, they should keep an eye out for opportunities, either through expansion or diversification.
Ben Kimball is Director of Business Development for ThinCats