UK Businesses threatened by rising insolvency threat

According to a report from the Office for National Statistics, there were over 5,600 registered company insolvencies between April and June. This represents a 13% increase on the previous quarter and an 81% rise from Q2 2021.

Weakening consumer demand and soaring costs, in addition to a volatile economic climate, are wreaking havoc for businesses.

Firms which sought government support throughout the pandemic have struggled since the measures were removed and have exhausted all other areas of traditional finance.

To avoid suffering a similar fate, UK businesses need to think outside the box and utilise alternative financial levers.

Firms are failing to source funding

During the pandemic, the government introduced special measures to keep many firms afloat including the furlough scheme. Since furlough support and the suspension of wrongful trading liability have been removed, businesses have been left to face the reality of their financial situation during the current crisis.

Many UK firms are looking for the vital finance they need to keep their heads above water but are struggling to get access during these challenging economic times. Creditors hate uncertainty - which is being exasperated by the current political and economic context – making it much more difficult for many businesses to secure loans.

Banks are risk adverse, particularly while the UK government deals with ongoing Brexit impacts, rising inflation, and the continuing uncertainty around the long-term economic outlook. The Bank of England has attempted to stem the soaring prices by raising interest rates to 1.75% but this will only serve to increase the cost of borrowing and reduce customer spending.

The shrinking of the sterling credit markets show that investors are worried, there already was an additional overhang in sterling credit which priced in lower liquidity. UK corporates that need liquidity and are struggling with the inflationary environment may struggle to service their debts or raise more capital to keep their businesses running.

With many directors opting to close their businesses, the UK could face a tsunami of insolvencies unless firms find alternative forms of finance.

Could Supply Chain Finance be the answer?

Many firms look to traditional financing schemes such as supply chain finance (SCF) which has become increasingly popular as firms look to free up cashflow for themselves.

According to a recent SCF report by McKinsey, buyer led SCF is now the fastest growing segment of the US$7 trillion trade finance market and is expected to post 20-24 percent growth in the five years to 2024.

While SCF can be seen as a small step in the right direction, it is not without its limitations. One of the major issues with SCF is its scalability down to small suppliers. Most small suppliers struggle to access SCF programmes because providers can’t justify paying the host of checks required including know-your-customer and anti-money laundering checks. 

The few suppliers that are large enough to be on-boarded by the SCF provider will still have payment significantly delayed because a supplier’s work doesn’t start the day an invoice is issued. This means that employers, especially SMEs, need alternative financial levers as prices surge.  

Pay Asset Finance

Pay Asset Finance (PAF) could be a better alternative for many firms looking to explore financial levers to avoid insolvency. This is a process in which an employer’s payroll, which is often their biggest expense, is processed into a form a funder can finance. This money is then made freely available to the employee, increasing their cashflow and reducing the wait for payday.

Businesses can finance payroll for weeks and release capital back into the company, boosting cashflow and freeing up liquidity. Furthermore, the money is made freely available to the employee as they earn it, increasing their cashflow and eradicating the feast or famine cycle of monthly play.

Employees can decide when they want to access their pay, helping to increase financial freedom, flexibility and wellbeing which are more important than ever given the current cost-of-living crisis.

A study by EY showed that more frequent pay has great benefits for the employer too. Employee attendance, retention and performance have all been shown to improve with flexible pay. This concept is just as attractive in the long run, as it allows employers to attract and retain top talent, improve wellbeing and productivity, and reduces absenteeism. 

It is estimated that PAF could make up to $20.3 trillion available in OECD countries. It is vital that UK firms look beyond traditional financing methods and turn to alternative methods of financing to remain solvent. Otherwise, we could be facing an ever-increasing number of insolvencies as trading conditions worsen over the coming months.