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 to company insolvency and ultimately administration.
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.
What approach will at-risk businesses take?
Although there is no sign of consumer confidence and spending dropping off as yet, there are a number of anecdotal reports of major purchases being put on hold. This is the case for consumers and businesses alike.
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 challenge.
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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