The economic disorder caused by the coronavirus pandemic will mean construction companies have to write-off £1.5bn in unpaid invoices in 2021, according to new analysis
Analysis by financial risk firm Red Flag Alert shows almost £754m of construction sector invoices were written-off in 2019.
The analysis follows news that the UK’s construction sector output plunged at the fastest rate since the financial crisis.
Based on Red Flag Alert’s financial modelling of insolvent debt over the past three years, the level of construction sector bad debt will spike during the coronavirus lockdown and rise further in 2021.
Insolvency figures to double
Mark Halstead, a partner at Red Flag Alert, said: “Typically, based on analysis from the past three years, around 3% to 4% of struggling businesses will fail each year.
“The economic impact of COVID-19 will see this rate of failure rise substantially, reaching well into double figures. This will leave a trail of insolvent construction sector debt totalling £1.5bn this year and could see levels of bad corporate debt in 2021 rising beyond £3bn.
“As a conservative estimate, this would mean construction companies have to contend with almost £4.5bn in unpaid bills between now and the end of next year.”
Halstead pinpoints the long tail effect of insolvent debt as a bigger risk to construction companies than the initial slowing of trade during the UK lockdown and companies adapting to the COVID-19 pandemic. He believes some of this will be mitigated by Government coronavirus support measures such as the Job Retention Scheme and Business Interruption Loans.
Red Flag Alert estimates that total bad business debt in the UK will rise to £8.6bn this year because of COVID-19.
‘Pandemic will be used to mask poor leadership’
Halstead added: “Unpaid debt ripple effects through supply chains, meaning that one large company going out of business will financially affect hundreds of other companies. This will prolong the impact of corporate insolvencies, causing another peak in insolvent corporate debt and business failures in about 12 to 18 months’ time.
“This peak in 2021 will also be driven by the pandemic leading to more robust due diligence and restricted lending. As a result, poorly managed companies will be unable to default to the tactic of borrowing their way out of trouble. Government support will prevent some of these company insolvencies this year, but it’s unfeasible for such support to continue in the long-term.
“Many failing companies this year and in 2021 will wholly blame coronavirus, but the reality is that the pandemic will be used to mask poor leadership, decision making and financial management.”
Halstead advises businesses to protect themselves against insolvent debt by tightening-up their creditor services and regularly health-checking the financial performance of the companies they deal with.
He said: “Debt can have an immediate impact on the security and operation of a company. This will be accelerated as insolvent debt rapidly increases. Businesses may find that customers and suppliers which were in a good shape just weeks ago, are now facing collapse.
“Spotting the early signs of their difficulties can prove the difference between adjusting payment terms, avoiding incurring further financial losses and finding alternative sources of supply.”