Insolvency risk as firms turn to maximum overdrafts for survival

An increasing number of British businesses could be at risk of needing insolvency advice after it emerged that many are using their maximum overdraft facilities on a regular basis.

In fact, the R3 figures show a rise of nine percentage points in the quarterly statistics, with more than a fifth (22 per cent) of companies using the emergency funding from their banks.

With times tough for UK enterprise at the moment, it seems that all the signs point to a growing number of organisations struggling.

The data from the insolvency trade body also showed an increase in the proportion of firms reporting a drop in profits.

More than two-fifths (43 per cent) were less profitable this quarter than in the previous three-month period – up eight percentage points over the same timeframe.

The Business Distress Index is now in its second year and showed that there are increased distress signs among UK firms in comparison to September 2010.

Seventeen per cent of British firms are now experiencing problems paying invoices in comparison to 14 per cent last year.

Furthermore, some companies seem to be digging themselves a bigger debt hole, with eight per cent now borrowing to pay off other loans.

Just 22 per cent of organisations reported a rise in profits, while 20 per cent have seen their market share grow, compared to 24 per cent who reported a decline.

R3 president Frances Coulson warned that there is a long way to go before insolvency practitioner's diaries become less hectic.

"Businesses are not out of the woods yet, with signs of distress increasing compared to last quarter on most key indicators. This worrying trend largely mirrors the slowdown in GDP growth we saw last quarter," she said.

"While current stresses might not be enough to push businesses over the edge, prolonged periods of distress will trigger an increase in formal insolvencies – we can see from our research that more businesses are having to use their maximum overdraft."

Separate R3 figures show that while the UK has recorded slow growth of late, many firms are still suffering from stagnation.