Following the first national lockdown in March 2020, there was a 13.5% fall in Q2 GDP which led many to predict that corporate failures and personal insolvencies were expected to skyrocket. However, 17 months on, corporate insolvencies have defied gravity and are at a 32 year low, whilst Scottish personal insolvencies were 44% lower in the year to March 2021. Why has the bloodbath been avoided?
Both companies and individuals have been supported by various measures introduced by national Governments and whilst household income fell by around 3% during the first lockdown, spending fell by 20% resulting in a huge upsurge in personal savings rate. Furlough has saved many jobs: in May 2020, it was estimated that 30% of the workforce across the UK was furloughed. For businesses, over £47 billion in Bounce back loans were borrowed by SMEs.
However, just as the health crisis has disproportionately hit poorer members of society, so has the financial impact disproportionately hit those on lower income individuals and SMEs in the corporate world. The personal savings increase has been disproportionately made by middle and higher income households, whilst those in lower incomes with less secure jobs have suffered hits to income through job losses and furlough. Worryingly, households with high consumer debt burdens have now returned to levels last seen in 2019 and despite the various support measures, more households are now reporting being in financial difficulty than at the start of the crisis. These households face the perfect storm of being vulnerable to loss of income through the ending of furlough, and not having accumulated any savings to protect them from these shocks.
In the corporate world, a similar story emerges, with the growth in demand for loans being concentrated on small and medium sized enterprises.
The instalment for Bounce back loans are falling due and estimates of non-payment so far range from between 5 – 10%.
Whether it’s an individual or a company, the lessons to be learnt are the importance of “rainy day” money: that can help buffer any shocks caused by turnover or income dropping. As we move towards tentatively thinking about how to start repaying the debt pile, there are some easy steps that both business leaders and individuals can take to get some breathing space.
Manage your cash
For individuals, it’s always good practice to shop around for the best deals on mortgages and insurance policies, whilst for companies, there are a variety of tools that can make a huge difference including invoice financing.
Moving existing debt onto cheaper or longer options will assist in getting the best deal. For companies with HMRC debt, arranging a time to pay can make a huge difference.
There are both formal and informal solutions available for individuals and companies that allow for breathing space through moratoriums and allow some forgiveness from debts which might otherwise be overwhelming.
The good news is, that the help is out there and the earlier it is sought, the more positive an outcome can be secured. Businesses and individuals all face different challenges. What’s important is to understand the complexities of each situation and to determine the best route. In my own experience, acute financial distress doesn’t signal the end. It can be a means to scrutinise the inner workings and performance of a business to deliver a plan of action that will set them on the right path for the future.,
With the prediction that the number of businesses & individuals facing financial distress is likely to grow significantly by June 2022*, getting the house in order and reaching out for the right help and support will provide more available options for consideration.
It is clear that alarm bells should be ringing for many businesses and for individuals post-pandemic but there are many steps that can be taken now to prevent insolvency moving forward. Businesses should use due diligence and seek advice the moment they sense a twinge of financial distress. If these steps are taken, many will find be able to prevent insolvency post-pandemic.
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