June 20 2013 Latest news:
By Duncan Brodie, Business Editor
Wednesday, January 9, 2013
BUSINESSES in the eastern region are bucking the national trend by showing significantly fewer signs of financial distress, according to new research by insolvency trade body R3.
However, the organisation, which represents professional insolvency practitioners, warns that a stagnant national economy could hamper regional recovery.
R3’s quarterly Business Distress Index indicates that the number of businesses in the region regularly using their maximum overdraft facility is around a quarter of the total of six months ago, having fallen from 39% to 11%.
There has also been a significant reduction, from 62% to 29%, in the number of East Anglian and East Midlands businesses experiencing reduced sales volumes, while only 27% say they are experiencing decreased profits, compared with 40% six months ago.
The R3 research also shows that in the last quarter, the number of “zombie” businesses in the region – those that are able to pay the interest on their debts but not reduce them – has fallen from around 55,000 to 18,300.
In contrast, R3’s research shows that, nationally, business distress levels have remained elevated, with one in five firms (20%) regularly using their maximum overdraft facility, one third (33%) currently experiencing decreased profits and nearly a third (31%) having seen a fall in sales volume.
R3’s eastern region chairman, Shay Lettice, a partner at Cambridge accountancy firm Peters Elworthy & Moore, said: “Whilst many local businesses appear to be starting to cope with recent economic challenges, the danger for such businesses is the stagnation of the national economy, upon which so many are reliant.
“A healthy regional economy requires national activity at both ends of the economic cycle – it needs business growth and expansion, as well as the recycling of capital following business failure. Unfortunately, the national picture shows there has been little improvement to those businesses that are consistently reporting distressed signs.
“There are a significant number of businesses being kept alive by the forbearance of banks, other key creditors and favourable interest rates, which is enabling them to stay afloat but make no in-roads on their debt.
“However, they are in a precarious situation with little prospect of growth. Any change in circumstance, such as a loss of a major customer or increased creditor pressure could easily push them into insolvency.”
On a more positive note, R3’s latest research shows a sizeable number of regional and national businesses are relatively stable, with nearly half of businesses reporting no distress signs at all.
Mr Lettic added: “It is encouraging that around half of businesses are not in a distressed situation, which is a considerable improvement on the figures two years ago. However, what is of most concern is the undertakings that have existed in a distressed situation for some time and are likely to have reported distress signs throughout the year.
“The fate of these businesses will have a major impact on the UK economy. If creditors become more rigorous in their pursuit of debts, there is likely to be a sharp rise in business failure. This may clear the ground for a quicker return to growth and free up capital for other, more viable, businesses. However if major creditors continue forbearance, we could see a continuous period of low growth.”