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May 02, 2014

Number of SMEs in "financial distress" rises

Number of SMEs in "financial distress" risesMore than 200,000 SMEs are in significant financial distress despite the improving economic climate, according to new research from business recovery firm Begbies Traynor.

The first quarter of 2014 has seen a 22% increase in the number of small firms suffering from "significant" financial distress compared with the equivalent period last year. That's in stark contrast to larger businesses, which have experienced a 14% decline in distress levels over the same period.

According to the findings, SMEs now account for 92%, or 207,505, of the 225,549 UK businesses facing significant financial distress, up from the 89% that were found to be at significant risk at the end of Q1 2013.

Begbies Traynor's Q1 2014 Red Flag Alert suggests that SMEs are being left behind as the UK recovery accelerates. According to the report, the biggest obstacles they face are limited access to funding, the risk of over-trading and increased competition.

Small businesses in consumer-facing sectors have fared worst over the past year, in particular in the troubled bars and restaurants sector. The number of general retailers in significant financial difficulty also rose – by 16% year on year. 97% of these troubled retailers are small businesses.

Julie Palmer, partner at Begbies Traynor, said: "In the worst performing industries such as retail, bars and restaurants, smaller enterprises are simply unable to compete with the buying power of larger chains and have struggled to match the discounts offered by bigger competitors seeking to maintain market share."

She added: "Larger firms across the economy who have easy access to bank finance and years of experience on their side, have been able to take full advantage of the economic resurgence through measures such as extensive discounting, capacity expansion and increased marketing."

Overtrading is a major threat to small firms as the UK economy recovers, said Palmer. "Increasing order intake driven by the rebounding economy actually exacerbates this problem, as businesses run into working capital shortages caused by overtrading. Many SMEs are unaware of how to access alternative financing. Unless this is addressed soon we expect this upwards trend in SME distress to continue through 2014."

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