The latest economic projections for the UK paint a challenging picture. Economic growth has stagnated, with the Office for National Statistics (ONS) reporting a second consecutive monthly contraction in GDP for October 2024. The economy shrank by 0.1% in both September and October, marking the first back-to-back declines since the early months of the COVID-19 pandemic in 2020.

These ripple effects could significantly impact insolvency rates. Historically, periods of economic contraction correlate with rising financial distress among companies, and this has proven to be the case in the last few months as well. 

Added to this, BDO’s latest report has revealed that UK business confidence has plummeted to its lowest level in nearly two years. The November Optimism Index dropped sharply by 5.81 points to 93.49, the steepest monthly decline since 2021. While it is clear that SMEs have been facing the most significant challenges, things are now looking bleak for self employed people as well. 

Should Self Employed Workers be Worried?

Self-employed workers and SMEs face increasing personal debt levels as they dip into savings to sustain operations. With over 5,000 self-employed individuals seeking debt help in the past six months and more than half owing over £10,000, financial pressures are mounting.

Employment has begun to decline again, with rising wages and shrinking payroll numbers adding to the strain on businesses. These pressures, combined with escalating energy costs and new regulatory burdens like the EU General Product Safety Regulation, could further strain small businesses and self-employed workers.

Despite these obstacles, some glimmers of optimism remain. Just before the beginning of the new year, many SMEs are pinning hopes on rising demand in international markets and are planning investments in technology and workforce development. However, concerns about talent shortages and profit margins persist.

Impact on Insolvency Rates

The UK’s recent economic downturn is poised to significantly impact several key industries, notably manufacturing, construction, retail, and hospitality.

Manufacturing and Construction

In October 2024, both manufacturing and construction sectors experienced declines, with output falling by 0.6% and 0.4%, respectively. . These contractions are attributed to weakened demand and rising operational costs, leading to reduced production and project delays. The downturn in these sectors not only affects employment rates but also disrupts supply chains, potentially causing a ripple effect across the broader economy.

Retail and Hospitality

Consumer spending, a critical driver for retail and hospitality, remained weak in October, with notable declines in these areas. Factors such as high inflation and increased living costs have curtailed disposable incomes, leading to reduced consumer confidence and spending. This decline in consumer activity directly impacts revenues in retail and hospitality, potentially leading to business closures and job losses.

Services Sector

The services sector, which constitutes a significant portion of the UK economy, showed no growth in October. Separate trade data from the ONS revealed a decline in both imports and exports of goods in October. Notably, exports to the European Union surpassed those to the rest of the world for the first time in nearly a year. 

What can SMEs do to Avoid Insolvency?

SME business leaders can take proactive measures to mitigate insolvency risks during these challenging economic times. One of the most critical steps is to strengthen cash flow management. Regularly reviewing financial statements to identify potential bottlenecks is essential. Negotiating favourable payment terms with suppliers and customers can help maintain liquidity, while options such as invoice financing or short-term funding solutions can provide immediate relief to sustain operations.

Cutting non-essential costs is another vital strategy. A comprehensive audit of expenses can reveal areas where spending can be reduced. For instance, optimising energy consumption and renegotiating utility contracts can significantly alleviate the burden of rising energy costs. 

Plus, if they are able to scale, now is the time for SMEs to consider expanding their offerings to meet evolving consumer demands outside the UK. Exploring international markets, particularly within the European Union, where recent trade data indicates growing export opportunities, can open new revenue streams and reduce reliance on domestic markets.

Regulatory compliance is equally important, as is effective workforce management. Staying informed about changes, such as the EU General Product Safety Regulation, and allocating resources to meet compliance requirements can prevent costly penalties and operational disruptions.

Engaging early with financial advisors is a critical step for businesses facing financial strain. Consulting with insolvency practitioners or business advisors can reveal restructuring options or debt consolidation strategies to alleviate financial pressure. 

Insolvency News | Invoice Financer Stenn Goes Into administration

UK-based fintech company Stenn, once valued at $900 million, has entered administration. This is potentially suspicious transactions connected to a Russian money laundering scheme, which is being investigated. The collapse was triggered by a reference to the company in a US criminal indictment, which prompted lenders, including HSBC Innovation Bank, to scrutinide its operations more closely.

Stenn, founded in 2015, specialized in invoice financing and partnered with major international banks such as Citigroup and Barclays. However, two of its UK entities were placed into administration after HSBC, which inherited exposure to Stenn through a revolving credit facility, filed an application in London’s High Court. The investigation by HSBC revealed questionable transactions, particularly a $1.7 million payment in 2020 from a Singaporean company tied to an unlicensed money transmitting business operated by Russian citizen Feliks Medvedev.

The indictment also linked Stenn’s founder and CEO, Greg Karpovsky, to a trading account used in the laundering scheme. While neither Stenn nor Karpovsky was formally accused of wrongdoing, the connections raised significant concerns. Karpovsky has denied any allegations of impropriety and stated his willingness to cooperate with administrators.

This is not the first time Karpovsky’s business dealings have come under scrutiny. Before establishing Stenn, he founded Eurokommerz, a Russian invoice finance company that collapsed in 2008 amid fraud allegations. Stenn’s auditor, EY, resigned in 2018 citing concerns over related party transactions, further highlighting historical governance issues.

Companies House records reveal it suffered $28.4 million in losses in 2023, up from $8.1 million the previous year, alongside a 5% drop in revenue. These pressures compounded existing challenges, leaving the fintech unable to recover.

Interpath Advisory has been appointed as joint administrators for Stenn. Their immediate focus is on stabilizing operations and engaging with employees, creditors, and stakeholders to maximize value during the administration process. The collapse marks a significant moment for the fintech sector, emphasising the critical need for robust compliance and governance in mitigating risks tied to international trade and finance.

Insolvency News | The UK Government’s New Business Growth Service Initiative for SMEs

The UK government has introduced the Business Growth Service, a new initiative designed to simplify and speed up access to government support for SMEs.

Announced by the Business Secretary just ahead of Small Business Saturday on December 7, the service aims to tackle the complexity of the existing support framework, which, according to recent data, was only used by 26% of SME employers in 2023.

Set to launch in early 2025, the Business Growth Service will feature a user-friendly, streamlined platform that offers a revamped online experience. It will work closely with small businesses, local authorities, and devolved governments to provide tailored, localised support to SMEs.

This initiative draws on international best practices and forms a core element of the upcoming Small Business Strategy, a key part of the government’s goal to simplify the process of scaling up in the UK and reduce associated costs.

Small business owners, who currently spend over 33 hours per month on administrative tasks, will benefit from significant time and resource savings. 

Insolvency News | The Greater Manchester Centre for Voluntary Organisation (GMCVO) Appoints Administrators

On November 27, GMCVO appointed Emma Mifsud and Charles Turner from the legal firm Opus Restructuring to oversee their administration process, as the firm’s business model is no longer sustainable. The administrators are conducting a review of GMCVO’s operations and are exploring the possibility of salvaging parts of the organisation by transferring them to other partners.

GMCVO, one of the UK’s largest local infrastructure organisations, operates five wholly owned subsidiary companies. These include three that manage social investment funds, one overseeing consultancy and research contracts, and another responsible for a conference centre and tenancies.

The St. Thomas Centre, which managed GMCVO’s conference centre and tenancies, is currently closed to the public while negotiations take place. However, it will remain accessible to tenants and event delegates with prior permission.

Recent financial challenges have led to the current situation. GMCVO’s latest accounts for the financial year ending March 2023 show an income of £3.32 million, against an expenditure of £3.65 million. In comparison, the previous financial year saw an income of £3.79 million and an expenditure of £3.55 million.

In its recent accounts, GMCVO acknowledged that the financial year 2023-24 would likely see significant losses due to investments in new systems and a shift towards different activities and income streams. The organisation stated that their reserves policy will need to be adjusted, and it is unlikely that they would have significant unrestricted reserves to manage unforeseen risks in 2024-25. As a result, stricter cost control and financial governance will be crucial.