Insolvencies on the rise at mid-sized UK SMEs

A new report has highlighted an increase in insolvencies among mid-sized UK SMEs over the past year and forecast that this trend could continue during 2023. The analysis, from alternative lender ThinCats, found that insolvency rates among mid-sized SMEs increased from 0.39 per cent in 2021 to 0.65 per cent last year.

What are mid-sized SMEs?
An SME is a business with a headcount of under 250 staff and turnover of under €50 million (approx. £43.8 million) or a balance sheet total of under €43 million (approx. £37.7 million). ThinCats defines mid-sized SMEs as those businesses with between 10 to 250 employees, between £1 million and £5 million in EBITDA and turnover of up to £20 million.

There are around 525,000 such businesses in the UK and, while they represent less than 5 per cent of private sector businesses, they are of huge importance to the UK economy, accounting for more than 25 per cent of private sector turnover.

What did 2022 bring for the UK’s mid-sized SMEs
As we’ve covered extensively elsewhere, 2022 proved hugely challenging for businesses of all sizes across the UK. Initial optimism at the outset of the year was quickly tempered by the start of Russia’s war in Ukraine.

The war greatly exacerbated existing supply chain issues that had festered in the wake of Brexit, drove spiralling cost inflation (which in turn fed into the cost-of-living crisis, pushing consumer spending down) and soaring energy costs.

These issues combined with the lingering effects of COVID-19, the debt piles that many had accrued during the pandemic and the end of COVID-related protections and support schemes to drive a huge increase in insolvencies last year. According to the Insolvency Service, UK insolvencies rose 57 per cent during 2022, with 22,109 company insolvencies representing the highest figure since 2009.

Among mid-sized SMEs, while there was an increase in insolvencies last year, the picture was not altogether as grim as for the rest of UK businesses. While the insolvency rate increased from a historic low of 0.39 per cent in 2021 to 0.65 per cent last year, this remained below the pre-pandemic figure of 0.74 per cent seen during 2019 and around three times lower than the high of 2.1 per cent seen during the financial crisis in 2009.

According to ThinCats, three key factors helped drive the uptick in insolvency rates among mid-sized SMEs. Firstly, pandemic support packages, such as business loans and the limit on creditor action, meant that many businesses that would otherwise have collapsed were propped up during the pandemic. At the time, this created fears of a mass of “zombie companies” and predictions that insolvencies would soar when support was withdrawn. This has proven to be the case, with a huge number of businesses failing once support ended.

Secondly, a considerable number of businesses may have been viable, but were so devastated by the impact of the pandemic on their specific sector (for instance, hospitality) that the end of support measures and the need to repay debts accrued during COVID proved too much for them to bear.

Finally, other businesses that fell into insolvency may have traded through the pandemic, but were subsequently brought down by issues that emerged during 2022, whether that was supply chain disruption, rising energy costs or higher interest rates. The bulk of these new headwinds are closely tied to Russia’s invasion of Ukraine.


Sector spotlight – Construction
The construction sector is among the industries most exposed to the adverse factors currently impacting UK businesses and a market that has prompted some of the most dire concerns regarding the future prospects of many of its operators.

During 2022, while the insolvency rate for the sector’s medium-sized SMEs remained below its pre-pandemic levels, at 0.97 per cent it was the third highest rate for any sector tracked in the ThinCats study – outstripped only by manufacturing (0.99 per cent) and consumer services (1.03 per cent).

SMEs are the backbone of the UK construction sector. According to ONS figures, of the approximately 342,500 construction companies in the UK, just 255 have an employee headcount greater than 300 and well over half have less than 10 full-time employees.

At the start of the year, Red Flag Alert warned that a “perfect storm” of headwinds could lead to more than 6,000 insolvencies in the sector during 2023. Given the fact that SMEs comprise the vast majority of the construction industry and the fact that smaller and medium-sized businesses are more at risk from prevailing issues such as bad debt, rising prices and supply chain issues than their larger counterparts, it is likely that the bulk of these insolvencies will be among SMEs.

As a result, it would be unsurprising if the insolvency rate for mid-sized construction firms rose considerably during 2023. This could, however, mean organic and M&A-driven growth prospects for solvent businesses and buyers looking to enter the sector, as distressed acquisition opportunities increase and a smaller pool of companies compete for contracts.

How will insolvencies shape up in 2023?
All the signs so far this year indicate that 2022’s increase in insolvencies will continue during 2023. While the UK may have avoided entering a full-on recession, businesses still face a raft of headwinds and economic uncertainty.

Begbies Traynor figures from the end of 2022 suggest that there were more than 610,000 UK companies in “significant” financial distress and, with 23,885 CCJs issued during Q4 2022 (a 52 per cent year-on-year increase), there is a distinct possibility that the worst of insolvencies are yet to come.

For mid-sized SMEs, ThinCats forecasts that insolvency rates will continue to rise, an increase which it says will begin to be driven more by the current global and national economic challenges than by the ongoing effects of COVID-19.

The report forecasts that the insolvency rate for mid-sized SMEs could surpass the 0.74 per cent seen prior to COVID-19 in 2019, but adds that “further substantial and very damaging economic shocks” would be required to push the rate past the 2.1 per cent level seen during the financial crisis in 2009.

Despite the predicted increase, ThinCats also strikes a note of optimism, pointing to the 7.7 per cent growth in the number of mid-sized SMEs last year (far outstripping the 3.8 per cent ten year average seen from 2010 to 2019), as well as recent forecasts that any economic downturn will be “shallower and shorter” than previous predictions suggested.

Given these potential silver linings, it is likely that an increase in insolvencies could bring with it a wealth of opportunities for buyers to acquire distressed mid-sized SMEs that, with the right funding and a good turnaround strategy, could be well placed to return to profitability and growth once the economy begins to recover.

As always during times of economic uncertainty, thorough due diligence will be required for buyers targeting distressed businesses. But, with the green shoots of recovery hinted at in this report, the right acquisitions could deliver enormous value for discerning buyers.

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