Ken Pattullo

This 30% increase compared with the same period the previous year comes as the country faces a strict lockdown which is likely to remain in place until at least February.

The latest data shows that year on year ‘significant’ distress in Scotland was reflected across the rest of the UK. This type of distress, which indicates early signs of financial problems, rose by 27% across the UK as a whole in Q4 2020 compared with Q4 2019, affecting a total of 630,000 firms.

Scottish businesses also saw a deteriorating picture quarter on quarter with a 14% rise in those seeing ‘significant’ distress since Q3 2020, slightly above the UK wide figure of a 13% increase.

In contrast, the country experienced a 40% fall in businesses experiencing ‘critical’ distress (which refers to businesses that have had winding up petitions or decrees totalling more than £5,000 against them) by the end of Q4 2020 compared with the same period the previous year. There was also a 19% fall in these advanced signs of distress in Scotland quarter on quarter.

However, it is likely that these figures are the tip of a very large iceberg. The coronavirus pandemic has reduced court activity limiting the number of decrees and winding up petitions being issued against indebted companies and there has been a ban on winding up petitions for Covid-related debts.

Ken Pattullo, managing partner for Begbies Traynor in Scotland, said: “It is extremely worrying to see such a huge rise in signs of early distress with so many Scottish companies struggling in the face of a continued fall-off in trade after nine months of almost constant Covid restrictions.

“While instances of more advanced signs of distress have actually fallen, this is probably due to the Government’s insolvency prevention measures which, together with pandemic-related financial aid, are masking the true picture. We fear that the latest research indicates escalating distress with more economic problems being stored up for further down the line, once these support measures are withdrawn.”

Every one of the 22 sectors in Scotland monitored by the Red Flag Alert research experienced double digit increases in ‘significant’ distress in the final quarter of 2020 compared with the last quarter of the previous year - a worrying sign for the Scottish economy as the financial situation worsened for many companies.

Scotland’s financial services sector was particularly badly hit with a 47% year on year and 26% quarter on quarter increase in ‘significant’ distress as the effect of the pandemic bites, along with ongoing uncertainty around equivalence.

Despite the booming residential property market, the whole real estate and property sector – a key indicator of the economy’s performance – has seen significant distress rise by 35% in the last quarter compared to the same period last year. Scottish construction businesses have also seen an impact, despite activity being able to continue during lockdowns, with a 30% increase in early signs of distress year on year.

With government restrictions forcing thousands of hospitality businesses to close or limit their operations, hotels have been one of the hardest hit sectors by CPVOD-19. Scottish hotels saw a 30% rise in early distress the last quarter compared with Q4 2019. However, these numbers are likely to be understated due to the short-term financial support options available which will be keeping thousands on artificial life support.

Mr Pattullo continued: “While these figures give an insight into some of the financial stresses that have been building in Scottish business, the sad truth is that, for many companies, the Government’s extended furlough and financial support measures will provide little more than a stay of execution as debt levels become unmanageable and structural changes across many sectors take their toll.

“Although the Government has extended its COVID-19 financial support, this simply won’t be enough for thousands of businesses who likely will not survive in the interim. Although the UK’s announcement of a trade deal with the EU and the roll-out of COVID-19 vaccines offer some light at the end of a very dark tunnel, the situation is going to remain bleak over the next quarter and beyond.”