With an uncertain economic climate and the many challenges that businesses have faced over the last 12 months, it may be surprising to learn that company insolvencies1 in 2020 were at their lowest annual level since 1989.
Despite the pandemic and the global economic downturn, many companies have managed to continue to survive by accessing support such as the furlough scheme, tax breaks and Government-guaranteed loans. This, coupled with low interest rates, has enabled many businesses to stay afloat that may otherwise have folded.
However, this package of Government measures comes at a significant cost to the Treasury, and we expect that financial support will start to be withdrawn in the coming months – the furlough scheme has been extended four times and is now due to finish at the end of September 2021.2
There are clear signs that many British companies are in trouble, with recent research revealing that 538 companies issued profit warnings in 20203. Over a third of UK quoted companies downgraded their profit forecasts in 2020, indicating the scale of businesses affected.
2021 is likely to be a year where we see a rise in company insolvencies, as many of the ‘Zombie’ companies kept alive by Government support will fail once that support is withdrawn.
Businesses that are in relatively good shape may also be vulnerable to the ‘domino effect’ if they have trading relationships with other companies that become insolvent and fail to pay for goods or services provided on credit. These risks can be mitigated and we are seeing that many businesses are seeking to protect themselves against the risk of non-payment and bad debts by purchasing Trade Credit insurance.
Tim Fisher, Managing Director, Trade Credit, said “Insurers are open for business and have risk appetite and capacity that we expect will reduce once the business failure rates begin to increase and claims rise.”
1. https://www.gov.uk/government/collections/company-insolvency-statistics-releases
2. https://www.gov.uk/government/publications/changes-to-the-coronavirus-job-retention-scheme
3. https://www.ey.com/en_uk/strategy-transactions/profit-warnings
