A sustained challenging environment

After a period of unprecedented upheaval, many had hoped 2022 would signal the return to normality. However, last year was more economically challenging than anyone could have anticipated. Russia’s invasion of Ukraine in February had far-reaching global consequences, exacerbating inflation and fuelling the energy crisis, against the backdrop of an enduring COVID-19 aftermath, with administrative backlogs and supply chain delays.

At a Glance – Key Statistics1

At a Glance – Key Statistics

Last year saw the highest number of company insolvencies since 2009, and an increase of 75% on the 12,632 insolvencies in 2020. The UK insolvency level is significantly above pre-pandemic levels in part due to business fatigue following the ending of government support measures and the weak economic recovery since Brexit.

Could you afford to cover a bad debt

Bad debts can have a devastating impact on businesses. Simply replacing loss revenue on the balance sheet requires a significant increase in extra sales.

Bad Debt Amount 4% Net Profit 5% Net Profit 10% Net Profit
£10,000 £250,000 £200,000 £100,000
£50,000 £1,250,000 £1,000,000 £500,000
£100,000 £2,500,000 £2,000,000 £1,000,000

Source: KPMG

The figures above dramatically show the additional sales required to finance a bad debt. For example, an unpaid invoice of £50,000 would require £1,250,000 of additional sales to rebalance the books, and that is before taking interest charges in to account.

Outlook for 2023

Businesses should brace themselves for further disruption; a mild recession is expected in Europe over the coming 12 months, attributed mainly to the energy crisis.

Persistent high-interest rates are placing those in debt under enormous stress. Like property owners with hefty variable-rate mortgages, highly leveraged companies may struggle this year.

Leverage can be a sound strategy if a firm’s cash flow can cover interest payments and clear the borrowed funds at maturity. However, it heightens the risk of bankruptcy if a business cannot meet its financial obligations.

It is anticipated that UK corporate bankruptcies will increase significantly by 10% in 2023, while globally they are set to rise by 19%.3

More positively, the tide may at last be turning. Company insolvencies reported in December fell 3.25% from the 2,029 reported in November 2022. Administrations also dropped from 134 in November to 112 in December.4 The Consumer Prices Index rose by 10.5% in the 12 months to December 2022, down from 10.7% in November.5

Predicting inflation is notoriously difficult, but central banks are going into battle, and experts predict that global inflation will remain under 6% in 2023.6 Brexit has now had two years to take root, and cooperation between the UK and Eurozone is improving. Energy prices are not at H1 2022 levels, and nor has fuel returned to the peak prices of last summer.

While business leaders are still approaching this year with trepidation, the Institute of Directors’ Economic Confidence Index, which measures business leader optimism relating to the UK economy, changed course in December. It rose to -58 from -64 in November.7

Sector focus

Construction was singled out last year as one of the worst hit sectors by insolvency in 2022. In the 12 months ending June 2022, construction saw 3,665 insolvencies in England and Wales, representing 19% of all corporate cases captured.8 Raw material prices, such as timber and metal, are falling back slightly due to the economic slowdown and the implications for this depend on where companies sit in the supply chain. China’s relaxation of its zero-COVID policy should further support this trajectory.

Food sector inflation is still uncomfortably high and there is a limited ability for manufacturers to pass increased costs onto supermarkets and consumers. The import and export of food and drink may have recovered to pre-pandemic levels, but the sector is still struggling due to the cost of living crisis and staff shortages. The situation has not been helped by the spate of industrial action, which slashed city footfall and tourism. Two-thirds of the UK’s top 100 restaurant groups were making a loss, and 1,406 UK restaurants closed their doors in the 12 months to May last year.9

Tim Fisher

“The insolvency domino effect can create extensive and unwanted ripples. If a customer goes into administration, there are obvious consequences – will any outstanding invoices be paid? If a supplier goes bust, a business could face a dramatic supply chain cost increase. A rival going bust may sound like good news at face value, but not if you both share the same supplier – a business that cannot survive without the competitor’s trade. Every change reverberates along the chain.

Protecting against this risk involves carefully monitoring trade partners, diversifying suppliers and customer base and trade credit insurance.

Trade credit is an effective risk mitigation tool that can protect businesses against customers failing to pay for goods or services provided on a credit basis, usually due to insolvency or lack of funds. It can also assist growth by supporting trade with unfamiliar customers or export markets. Currently, the market for these risks is competitive with underwriters exhibiting a strong risk appetite.”

Tim Fisher - Managing Director, Trade Credit, Gallagher

Conditions and Limitations

This note is not intended to give legal or financial advice, and, accordingly, it should not be relied upon for such. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. In preparing this note we have relied on information sourced from third parties and we make no claims as to the completeness or accuracy of the information contained herein. It reflects our understanding as at 9 January 2023, but you will recognise that matters concerning COVID-19 are fast-changing across the world. You should not act upon information in this bulletin nor determine not to act, without first seeking specific legal and/or specialist advice. Our advice to our clients is as an insurance broker and is provided subject to specific terms and conditions, the terms of which take precedence over any representations in this document. No third party to whom this is passed can rely on it. We and our officers, employees or agents shall not be responsible for any loss whatsoever arising from the recipient’s reliance upon any information we provide herein and exclude liability for the content to the fullest extent permitted by law. Should you require advice about your specific insurance arrangements or specific claim circumstances, please get in touch with your usual contact at Gallagher.