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UK faces tsunami of insolvencies

By David Brown, Founder and CEO of Hi

Corporate insolvencies grew significantly in England and Wales in Q2 2022 according to official data published by the ONS. Between the start of April and the end of June, there were over 5,600 registered company insolvencies, representing a 13% increase on the previous three months and an 81% rise from Q2 2021. The combined threat of soaring costs and weakening demand, against the backdrop of a volatile economic environment is presenting real challenges for businesses. These firms, which were supported through the coronavirus pandemic by the government, have struggled since these measures were removed, and have maxed out all other areas of traditional finance. UK firms need to get creative and explore alternative financial levers to avoid experiencing the same fate.

Credit crunch driving insolvencies

During coronavirus, the government introduced special measures to artificially keep many firms afloat. Since the furlough scheme and suspension of wrongful trading liability have been removed, businesses have been left to face the reality of their financial situation post-pandemic. Many UK firms are looking for the vital finance they need to keep their heads above water but are struggling to get access during these challenging economic times. Creditors hate uncertainty - which is being exasperated by the current political and economic context – making it much more difficult for many businesses to secure loans.

Banks are risk adverse, particularly while the UK government deals with ongoing Brexit impacts, rising inflation, and the continuing uncertainty around the long-term economic outlook. The Bank of England has attempted to stem the soaring prices by raising interest rates to 1.75% but this will only serve to increase the cost of borrowing and reduce customer spending. The shrinking of the sterling credit markets show that investors are worried, there already was an additional overhang in sterling credit which priced in lower liquidity. UK corporates that need liquidity and are struggling with the inflationary environment may struggle to service their debts or raise more capital to keep their businesses running. With many directors opting to close their businesses, the UK could face a tsunami of insolvencies unless firms find alternative forms of finance.

Growing interest in SCF

Many firms look to traditional financing schemes such as supply chain finance (SCF) which has become increasingly popular as firms look to free up cashflow for themselves. According to a recent SCF report by McKinsey, buyer led SCF is now the fastest growing segment of the US$7 trillion trade finance market and is expected to post 20-24 percent growth in the five years to 2024. While SCF can be seen as a small step in the right direction, it is not without its limitations. One of the major issues with SCF is its scalability down to small suppliers. Most small suppliers struggle to access SCF programmes because providers can’t justify paying the host of checks required including know-your-customer and anti-money laundering checks. The few suppliers that are large enough to be on-boarded by the SCF provider will still have payment significantly delayed because a supplier’s work doesn’t start the day an invoice is issued. This means that employers, especially SMEs, need alternative financial levers as prices surge. 

Payroll financing

In my view, firms are ignoring their biggest expense: payroll. And financing payroll is a much better alternative to traditional borrowing and SCF schemes. Payroll financing or Pay Asset Finance (PAF) is a process in which an employer’s payroll is processed into a form a funder can finance. This money is then made freely available to the employee, increasing their cashflow and reducing the wait for payday. Businesses can finance payroll for weeks and release capital back into the company, boosting cashflow and freeing up liquidity. Furthermore, the money is made freely available to the employee as they earn it, increasing their cashflow and eradicating the feast or famine cycle of monthly play. Employees can decide when they want to access their pay, helping to increase financial freedom, flexibility and wellbeing which are more important than ever given the current cost-of-living crisis.

Market research shows that more frequent pay improves attendance, retention and performance. It also hints those employers will benefit in the long run through attracting and retaining the best talent, improving wellbeing and productivity while reducing absenteeism. It is estimated that PAF could make up to $20.3 trillion available in OECD countries, vital cashflow at a time when businesses are struggling to pay their bills and manage rising debt. UK firms need to look beyond traditional financing methods otherwise we could be facing an ever-increasing amount of insolvencies as trading conditions worsen in the coming months.