It’s Blue Monday, so what does 2025 look like for insolvencies?
Today is supposedly the most depressing of the year, and businesses appear to be lacking confidence too, says Sarah Rayment
Today is Blue Monday, supposedly the most depressing day of the year, when the reality of gloomy weather, Christmas debt and post-holiday blues all kick-in. But it’s not just individuals feeling the effects, business confidence has taken a hit too.
We have had multiple reports showing the grim realities that many private businesses are facing heading into 2025. The British Chambers of Commerce said in its recent survey that in response to tax increases, confidence has ‘slumped’ to its lowest in two years. The Federation of Small Businesses say almost a third of small businesses plan to cut headcount as a result of the forthcoming Employment Rights Bill. Early data from the ONS showed ‘minimal’ growth in the retail sector in the crucial Christmas period reflect that we should expect more distress and insolvencies over the next 12 months.
2024 was a little bit less eventful in insolvencies compared to the years prior. After the pandemic, we saw a huge spike in liquidations, peaking in 2023. Here, mainly microbusinesses, who clung on post-Covid, simply running out of cash in the face of higher borrowing costs and other external factors. Whereas among company administrations, an insolvency process where an underlying business is saved and usually a better indicator on the health of the economy, the overall numbers have been fairly flat over the past 12 months, albeit we have seen a return to pre-Covid levels.
In many ways there has been a lot more certainty in the market over the past 12 months. While there are of course individual challenges for different sectors, inflation is far more stable and with interest rates slowly beginning to fall, directors can begin to make decisions. As a result, we are seeing more natural activity with M&A and transactions taking place. There is also a lot more certainty following the outcome of the General Election too.
Insolvency is only one course of action
Insolvency and business failure can often be deemed as negative and perhaps paints a reflection on the health of the high street rather than understanding that times change and business models don’t always evolve. It is only one course of action for companies, quite often when all other options have been exhausted. In fact, we have seen a great deal of restructuring activity in the past 12 months. Companies adapting to the new monetary environment or broader changes in society may need to reconfigure how their business is structured or funded.
Clearly the next six months and beyond will be challenging for all businesses. While we will see a lot of focus and distress across retail, hospitality, leisure as well as care homes, where the added costs of taxes, wage increases and business costs will be especially acute. There are still difficulties across other sectors notably construction, manufacturing and real estate.
That is before we even consider what a Trump presidency means for the global economy or whether the recent increase in the cost of government borrowing may lead to further tightening by the Chancellor.
Looking ahead and trying to forecast who will be affected, size will certainly insulate many companies, especially mid-sized and larger corporates, who can absorb costs, pass on to customers or defer investment. They also tend to have access to advisers who can help. My concern is for smaller businesses, where margins are already thin and costs can’t easily be passed on. If they aren’t planning already, the weather may have improved by April, but their prospects may be more bleak.
Sarah Rayment is global head of restructuring at Kroll