SIGNIFICANT numbers of Scottish businesses are surviving only because they are not being forced to repay their debts, leaving the economy susceptible to sluggish growth for the foreseeable future.
New figures from insolvency trade body R3 show there has been no improvement in the number of companies consistently reporting signs of distress, with more than one-third posting lower sales, reduced profits and higher redundancies during the past three months.
One in ten Scottish firms has had to renegotiate payment terms with creditors, compared to just 4 per cent across the rest of the UK.
John Hall, R3 council member for Scotland, said many firms were clearly struggling to cope with the tough economic climate.
“There are a significant number of businesses being kept alive by the forbearance of banks, other key creditors and favourable interest rates, which is enabling them to stay afloat but make no in-roads into their debt,” Hall said.
“However, they are in a precarious situation with little prospect of growth. Any change in circumstance, such as a loss of a major customer or increased creditor pressure, could easily push them into insolvency.”
Ten per cent of Scottish companies said they had expanded during the past three months, short of the 18 per cent average for the rest of the UK. One-third of Scots firms were deemed either stable or growing, but those in distress had probably been encountering difficulties for a year or more.
“If creditors become more rigorous in their pursuit of debts owed to them there is likely to be a sharp rise in business failure,” Hall said.
“This may clear the ground for a quicker return to growth and free up capital for other more viable businesses. However, if major creditors continue their forbearance we could see a continuous period of low growth.”
Across Scotland, 35 per cent of firms reported lower profits during the past three months, while 32 per cent reported a reduction in sales volumes. A further 31 per cent said they were regularly using their overdraft facility.
SMEs experienced significantly higher levels of distress than larger businesses: 37 per cent of smaller firms reported a decrease in profits, compared to 19 per cent of medium-sized and 7 per cent of large firms. The only distress sign that bigger firms were more likely to report was that of making redundancies. Hall said smaller companies typically have less access to capital, making them more vulnerable than their larger counterparts. SMEs also have less scope to deal with changing circumstances such as the loss of a customer or increased pressure from creditors
“SMEs are not able to diversify quickly enough to change their business in response to such events and typically do not benefit from adequate financial resources to restructure,” he said.
“Large businesses have the tools to relocate or cut head count, for example. For this reason, it is not surprising that large businesses are experiencing higher levels of redundancies.”