Inflation, Insecurity and Insolvency: Has the 'Bounce-Back' Bubble Burst?

Since the start of the current decade, people looking for crumbs of comfort on the pages of our national newspapers have been hard-pushed to find any.

Having come through a global pandemic which has exacted a terrible toll on lives and livelihoods, we now find ourselves dealing with war, extreme weather and political uncertainty.

Some of those factors, of course, have impacted on the cost of living.

Only this week, the Office for National Statistics (ONS) detailed how the Consumer Price Index - the main barometer of annual price rises - had reached 10.1 per cent, its highest rate for four decades (https://www.thetimes.co.uk/article/442da9e2-1deb-11ed-b7c3-8b288ab55a56?shareToken=e669fc1cb1e10ed76032b0aba54ddc80).

Those figures almost coincided with further proof that the squeeze on the financial circumstances of consumers and businesses has very real consequences.

It came in the shape of the latest data on company insolvencies which showed that the number recorded in July was 67 per cent higher than during the same month in 2021 (https://www.gov.uk/government/statistics/monthly-insolvency-statistics-july-2022/commentary-monthly-insolvency-statistics-july-2022).

Furthermore, that research makes clear that the situation is not simply a hangover from lockdown. July's insolvencies were higher than during the same period in 2019, well before Covid-19 began to directly affect our day-to-day lives.

If anything, I believe that what we're seeing is a tipping point: businesses supported through the pandemic now unable to continue because of increasing costs. That certainly echoes what we are seeing on a daily basis.

Back in the early weeks of lockdown, the Government established a series of schemes to keep firms afloat. They included initiatives to lend money to companies whose trade had been badly interrupted by measures to combat the spread of coronavirus and 'Bounce Back' loans to help businesses return to full commercial activity.

Under the latter scheme, small and medium-sized businesses were able to borrow between £2,000 and £50,000 at low interest rates from approved lenders, with those loans then guaranteed by the Government.

Data published only a fortnight ago by the Department for Business, Energy and Industrial Strategy (DBEIS) highlighted how just over £77 billion was loaned out in all (https://www.gov.uk/government/publications/covid-19-loan-guarantee-schemes-repayment-data/covid-19-loan-guarantee-schemes-repayment-data-as-at-31-march-2022).

However, the strain of meeting related repayments together with the more routine expenditure associated with running a business has undoubtedly been compounded by rising fuel, material and employment costs.

As a result, the same package of figures shows that just over 10 per cent of those loaned cash were either in arrears or had defaulted by the end of March. The outstanding amounts involved add up to more than £5.54 billion.

Some news reports have suggested that many companies are at least considering price rises in an effort to insulate themselves from severe current pressures (https://www.thisismoney.co.uk/money/entrepreneuracademy/article-11028675/Half-small-businesses-mull-price-rises-combat-cost-living-crisis.html).

Whilst it's hoped that competitiveness and entrepreneurial resilience will keep the vast majority going, the prospects do not look promising. As costs remain high, it is highly likely that company insolvencies will rise still further.

Nevertheless, there may still be succour for those readers seeking a little relief from an otherwise bleak picture.

If we look hard at material produced by the Insolvency Service, we see that the number of bankruptcies in July was one-sixth lower than that in 2021 and down two-thirds on the figure for the same month in 2019.

That indicates creditors possibly being willing to offer individuals more time for debts to be settled.

The idea that alternatives to company closure are being explored could also account for the rise in Debt Relief Orders (DROs) and rises in both Individual Voluntary Arrangements (IVAs) and so-called 'Breathing Space' agreements, which protect individuals with problem debt from action by creditors for a certain period of time.

In my experience, organisations pursuing money which they may be owed are generally open to discuss options which can keep debtor companies in business. It is, they reason, better to recoup even some of their losses than miss out altogether if a troubled firm does go bust.