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As the UK economy picks up, are businesses safe from insolvency?

The UK economy growth picks up to 0.7% in second quarter… but does this mean that businesses are safe from insolvency?

It is common for people to associate insolvency practitioners with underperforming companies, and rightly so in many circumstances. I quite often hear my peers commenting on how the insolvency industry must be extremely busy during the recent economic climate and they are somewhat surprised with my response. Yes that’s right, in recent years the insolvency industry has been relatively quiet compared to previous periods.

Accelerated growth can often spark insolvency

You may be surprised to read that it is actually rapid economic growth that can often lead to an increase in corporate insolvencies, normally as a result of overtrading. In an expanding economy, businesses and entrepreneurs decide to take additional chances and subsequently expose them to risk which for some, does not pay off.

When the economy is expanding it is often the role of insolvency to responsibly deal with the ‘losing’ businesses. These businesses can often be the result of accelerated growth without the financial or personnel infrastructure to support it. It is not unusual for start up companies to take on more work then they can manage and this can often lead to failure.

The expanding economy provides eager entrepreneurs with opportunities to develop their businesses but they can sometimes struggle to acquire the business finance to support the opportunities. As a result they tend to stretch their available resources.  With resources being strained, a small bump in the road can cause a significant, unmanageable issue.

Stretched resources need funding

This availability of business funding has a significant role to play in business and overall economic growth. Unfortunately for new start ups, or any company that does not fulfil the bank’s requirements, funding can be difficult to obtain.  In an effort to provide such businesses with a lifeline, there are a number of alternatives to the traditional lenders, like Cashsolv, an associated firm of Portland, who will look at the likely success of the venture itself whilst considering a number of options for security.

An additional consideration when considering the impact of the recent economic growth on businesses is that in due course interest rates will move. The increase in interest rates is being widely debated at present and when it inevitably rises it could have a large impact on businesses that operate with significant borrowings. Many businesses throughout the recession have only been maintaining their level of debt and they may begin to find that they are no longer able to do so.

Seek advice early

In summary, the effect of economic growth will have a varied impact on businesses.  Some businesses will suffer from unmanageable growth and the expected increase in interest but in contrast many will prosper. Therefore businesses should not consider them safe from insolvency as a result of the recent growth reported. New start ups in particular should always be conscious of managing their cash flow.

Our guidance at Portland is to always seek advice early, whatever the issue. We are experienced professionals who can identify and recognise problems being faced now or that might be faced in the future. We are able to use our experience and commercial knowledge to add real value in terms of helping directors deal with their business problems.

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