Begbies Traynor's latest quarterly Red Flag Alert report, which monitors the financial stability of UK businesses, shows that the number of small and medium-sized UK business reporting "significant" financial distress increased by 11% from Q2 to Q3 of 2012.
The firm said that this reflected an increasing amount of ‘zombie firms’ - those saddled with debts and only generating enough cash to pay off the interest - that pose a serious risk to economic recovery.
The report gathers data on around 220,000 large and small and medium sized businesses across the UK to assess whether their levels of financial distress are considered either ‘significant’ or ‘critical’.
‘Significant’ distress relates to those with minor county court judgements (CCJ) against them (less than £5,000) or with marked deterioration in financial indicators such as working capital or net worth.
Businesses classed in the ‘critical’ category are those that have accrued more than £5,000 in CCJs within three months, have entered a Corporate Voluntary Arrangement or have winding-up petitions against them.
The Q3 data shows a stark divide between SMEs with an 11% rise in those with significant financial distress compared to a 61 decline in the number of large companies reporting the same distress levels. Additionally the number of companies reporting ‘critical problems fell by 17% across the quarter.
Financial health among print and packaging businesses reflects the national story, with 44% (73) fewer large companies showing signs of significant problems, while a shocking 52% more (1,201) SMEs fell into that category in Q3 compared to 873 in Q2. In the critical category there were 21% fewer businesses from the print and packaging industry - 27 in Q3 compared to 27 in Q2.
Begbies Traynor partner Gary Lee said the figures reflected the fact the small companies were "taking the hit" from the tough market conditions
"The larger companies are showing signs of improvement because they are really starting to squeeze their smaller counterparts on price, payment terms and conditions because they want to maintain their market share.
Lee said that the drop in numbers reporting critical problems should not be mistaken for a positive reflection of overall financial health.
"It simply shows us that the number of companies managing to keep out of insolvency is growing because of a whole combination of things like low interest rates and creditor forbearance," he explained.
He added: "This is hindering the recovery because it impacts on other businesses. The zombie companies are simply existing. But they are keeping their market share away from healthier competitors."
The figures are backed up by the latest BusinessIQ Insolvency Index from Experian which shows the number of business insolvencies fell 3.1% in September 2012 compared to 2011, with smaller businesses (1-50 employees) showing the lowest rates of those falling into insolvency – up to 16.4%.
Insolvency levels in the printing, paper and packaging industries were largely in line with the national picture showing a 3.4% improvement since September 2012.
Meanwhile the report revealed an increasing divide across the board between the stability of those in the south compared with their competitors in the north and print and packaging firms are no different. In London the number of industry firms with combined critical and significant financial problems rose by 11% in Q3 while in the north the figure rocketed by 58% to 1,228.
Lee said that unless improved credit and finance measures were introduced by government there was unlikely to be an improvement in the near future.
"What we need is investment from the government. It’s about trying to balance austerity," he added.
