Real rate of insolvencies

Entrepreneurial spirit in the UK could be in danger of being dampened by the increase in company failures, despite the fact that the real rate of
insolvencies is still significantly lower than in the recession of the early nineties, according to a new report. 



Analysis in Experian’s Quarterly Insolvency Report and Distress Index shows that the business birth rate (new registrations as a
percentage of the business population) dropped to 11 per cent in 2008. This was the lowest rate since 1994 and nearly five per cent down on 2007.

Although more than 350,000 new
businesses were registered in 2008, these declines were against recent increases in insolvencies in volume terms. Together with concerns about the economy, this could
now be impacting on start-up activity, causing would-be entrepreneurs to think twice before embarking on their own venture.

However, the report reveals that, proportionally, significantly fewer firms are failing so far, compared to the last recession, because of the increase in the size of the UK business
population in recent years. As a result, since Q1 1992 (when the insolvency rate was 0.82 per cent) the real rate of insolvencies actually declined until 2006, and has only risen slightly since. The figure currently stands at 0.32 per cent per quarter
(Q1 2009), with 6,495 failures in a total business population of 2.05million registered businesses.

And while the financial turmoil seen at the end of 2008 was reflected in a slight
uplift in the insolvency rate in Q4 2008, this has subsequently declined again and is currently less than half that of the last recession. 


Says Rolf Hickmann, managing director of pH, the company that conducted the research: “Our analysis shows that the business-to-business population is still fairly resilient on the whole and has not yet suffered
significant insolvency rates from the credit crunch, despite the fallout in the financial sector.

“Small firms in particular are showing themselves to be resilient, while mid-sized
businesses appear to be bearing the brunt of the downturn. Whether we are now at the start of an upward trend, as seen in the third quarter of 1990, or whether the insolvency rate
will flatten still remains to be seen. The net effect of a lower birth rate and higher death rates means that the total business base is growing more slowly, but it is still growing.”