Will we see a rise in insolvencies as the economic recovery accelerates?

15th July 2014

A rise in company liquidations is generally expected as an economy moves out of recession and recovery gathers pace. So far, however, there has been no sign of this usual signpost of a return to growth.

Seasonally adjusted figures from the insolvency Service for Q1 2014 suggest that the total of company insolvencies (including Compulsory Liquidations and Creditors’ Voluntary Liquidations) has remained stable compared with those from the four quarters of last year.

Having said that, the numbers of compulsory liquidations in Q1 were 53% up on those from October to December last year, but according to the Insolvency Service this can be explained by unusually low figures for the last quarter of 2013. So what should directors of smaller companies be watchful of when an economy is on the upturn?

We would suggest that a big risk, often unforeseen by many businesses, is overtrading – that is not having enough working capital to meet a rapid increase in orders.

This is a particular problem for the smaller business. Many have survived the worst by keeping a tight control on cash flow and paying down as much debt as possible. Yet as trading conditions improve these small firms are unable to access any finance from traditional sources such as bank loans and overdrafts.

As confidence returns the construction industry is likely to pick up ahead of other sectors. We are already seeing a lack of working capital causing stress in recovering companies. Whilst asset based lenders and factors can sometimes step in to help, we suspect that other sources such as peer to peer lenders and crowd funders may gain a foothold in the financing mix.

What other options for small business funding have you come across?