The number of companies in trouble has soared, according to the latest Red Flag Alert report from business recovery specialists Begbies Traynor.

And it is warning of a longer and deeper recession as the credit crunch continues to bite.

The overall regional increase for companies facing critical problems hit 82 per cent in the fourth quarter of last year against the same period in 2007.

The hardest hit regions were Scotland, up 129 per cent, and the West Midlands, up 111 per cent.

In the West Midlands the number of companies facing critical problems in December was 159 against 93 in the same month of 2007. The equivalent for significant problems was 4,901 (3,208). The monthly average is running at 163 against 77, up 111.3 per cent.

John Kelly, partner in the Birmingham office of Begbies Traynor, said: “It does not surprise me that the West Midlands is up there with Scotland as the worst affected.

“We are being hurt by the uncertainty in the auto sector – the likes of Jaguar Land Rover, JCB and LDV are almost putting production on hold. And that stops them from buying from suppliers. Suppliers cannot survive with two month of no sales and no certainty of when these orders will return.

“Construction is also in trouble. Look at all the development around Birmingham – the cost of completing some of these schemes is now more than they are worth such is the fall in values. And on the commercial side speculative development has stopped because of the Government’s legislation on rates liability for vacant premises.”

Red Flag measures corporate distress signals such as county court judgments, analysing companies facing either significant or critical challenges.

It comes on the back of a host of surveys and statistics showing marked declines in business activity and confidence along with growing unemployment.

But there are some positive indications – businesses looking for bargains are showing more signs of buying while the rate of increase among firms getting into difficulty has slowed.

The report warns: “As the credit crunch continues, seemingly unabated, so has the increasing number of companies receiving adverse actions.

“Current economic conditions are not being helped by the restricted lending market. Despite the injection of significant funding by central government, lenders are still facing problems themselves.

“The consequence of this prolonged lack of confidence in finance markets, still reeling from the extended effects of the fall of Lehman Brothers, is likely to be a longer and deeper recession than had been expected.

“In our own experience there is still some lower level bank lending available to SMEs with strong asset bases, although criteria and terms are certainly tougher. There is also the first sign of a positive trend appearing in investment by business angels and trade buyers becoming more active in taking the opportunity to acquire companies or assets at depressed prices. This may mean that there is a belief developing that asset values are reaching a floor and are now worth buying in anticipation of the eventual recovery.

“Despite this the average of forecasts for GDP growth in the UK for 2009 show a decline of 1.7 per cent, with some forecasts showing a fall of up to -2.5 per cent being possible. Further fiscal initiatives to stimulate investment and spending, in an effort to shorten the recession, are unlikely to have any short term effect and forecasters do not see any positive GDP growth until 2010.”

Red Flag Alert notes that the seasonal influence on court actions tends to reduce the number of companies receiving judgments in the run-up to Christmas but cautions this is expected to be counteracted during the first quarter of this year.
However, reviewing year on year figures, it states: “It is clear that the rate of increase has slowed significantly from previous quarters.”

The latest figures for companies facing ‘critical problems’ show the overall increase for all regions was 82 per cent in the
latest quarter, compared to 477 per cent in Q3.

The total saw 1,811 companies facing critical problems – those with county court judgments totaling £5,000 or more and/or winding-up petition related actions – in December against 1,242 in the same month of 2007, and 62,134 with significant problems – those with either a court action or issues with their accounts – against 38,943.

By sector, quarter four 2008 against quarter four 2007, the worst respective rises in those facing critical problems were – advertising, 191 per cent; construction, 190 per cent; transport and communications, 170 per cent; recruitment, 159 per cent; property services, 156 per cent; engineering, 131 per cent; and automotive, 116 per cent.
Others were retail, ahead 81 per cent, and financial services (75 per cent).