In a follow-up to our article about the potential impact of
Brexit on SMEs and the insolvency regime, this week we're
digging a little deeper into what the experts warn will be ' an
inevitable increase in company insolvencies'.
The driver behind this grave prediction is the expected fall in
the discretionary spend of consumers as purchasing decisions become
increasingly cautious. Those businesses that rely on this spend,
predominantly in the retail, travel and house building sectors,
could suffer financial difficulties before the end of this year.
The result will be an 'inevitable increase' in the number
of businesses experiencing a period of financial distress, leading
company insolvency and ultimately
Currently, there is still much uncertainty about the timing and the terms of the UK's exit from
the EU. It is also unknown what the UK's future trading
relationships with the wider world will be. Until these issues are
resolved, consumers are likely to delay significant purchases and
businesses will defer major investment decisions. The result will
be a downturn which could mean more companies feel the strain.
Smaller businesses are most at risk
Arguments will remain about whether the decision to leave the EU
will be beneficial or detrimental for the UK over the coming months
and even years. In the meantime, this uncertainty will not be
advantageous for some of the UK's smaller businesses.
While we wait to see how economic factors like jobs and interest
rates will be affected by our decision to leave, there is likely to
be a tightening of budgets. This drop-off in consumer spend will be
most keenly felt by smaller businesses, which lack the reserves and
cash-flow to absorb a fall in sales.
Another factor that could leave smaller businesses exposed is
the availability of company rescue packages available. While there
are a number of options available to small, viable businesses, such
as restructuring and
company voluntary arrangements (CVAs), typically rescue
packages are more common among the bigger brands.
If there is a fall in spending, the experts predict the first
true effects are likely to be felt in the final quarter of this
year. Businesses that find themselves under increased financial
pressure are expected to take a similar approach to those that rode
out the financial crash in 2008. Rather than making mass
redundancies – the hallmark of recession in the early 1990s
– businesses can choose to reduce staff overtime, apply
freezes on recruitment, move some existing staff onto part-time
contracts and even negotiate salary reductions.
The role of the Bank of England
So far the Bank of England has done a good job reassuring UK
businesses and the public at large, but it still has a difficult
path to tread. Creating the right conditions for business growth in
the political and economic climate will certainly be a
Currently, there are concerns that the weak pound will increase
the cost of imports, which in turn could lead to a rise in
inflation and reduce consumer spending. Typically, an interest rate
rise would be used to quell any inflationary rises. However, many
businesses would be against such a rise as it would increase a
business's costs. One thing's for sure, with interest rates
set at just 0.5 percent, the Bank of England's hands are
clearly tied in respect to any reduction in interest rates as rates can only
be cut so far.
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