The number of companies going bust because of the economic downturn will peak in the first half of 2012 before falling in the second half, according to research by Leeds University Business School.
But the Credit Management Research Centre’s Quarterly Insolvency Report (Q1) also found that banks often remain unwilling to lend to small and new companies and that this is contributing to these companies going out of business in the first three months of 2012.
The report tracks the number of business going into insolvency on a quarterly and monthly basis from January 1998 to the end of March 2012. The size, age and the sector each company operates in are also tracked.
In the first quarter of 2012, the total number of insolvencies reached 5166 up from 4412 for the same quarter in 2011 with retail, wholesale, hotels and restaurants hit particularly hard, along with construction and real estate. Publishing and printing firms were found to have performed rather better.
Report author Nick Wilson, Professor of Credit Management at Leeds University Business School, said: “The final quarter of 2011 saw the UK economy move back into negative growth, and now the latest GDP figures show the UK is in a double-dip recession. The indication from insolvencies is that the second wave is nearing peak. But the combination of weak demand from the UK and overseas and continued uncertainty in the Euro-zone has put further pressure on corporate revenue, cash-flow and profitability.
“Although corporate debt levels and the ability of companies to meet interest payments show signs of improvement, continued economic stagnation has pushed more companies into insolvency. Corporate insolvencies reached a peak in 2009 as the banking crisis impacted on the real economy and dropped back to pre-crisis levels in the first quarter of 2010.
“We also found a sharp increase in liquidations and administrations in the last two quarters of 2011 and forecasts at that time suggested a further rise into 2012. The data from the first quarter of 2012 confirms this and insolvencies show a sharp increase on the first quarter of 2012 and on the last quarter of 2011. It is likely however that corporate insolvencies are now near peak and are forecast to improve (decline) in the latter part of 2012.”
The report showed an increase in the number of businesses aged between three to ten-years-old going insolvent and a significant increase in medium-sized and established firms going out of business. The issue of getting banks to lend more to small and medium sized companies remains a problem, according to Professor Wilson.
He said: “Lending to smaller and medium-sized companies has declined in the recent period. Such periods of credit rationing are indiscriminate and cause financial distress amongst the innovative and growing companies as well as the new and established ones.”
A copy of the report is available here: www.cmrc.co.uk