Pictured above: John Kelly

The pressure cooker of UK business is heating up again with more and more companies showing signs of "significant" or "critical" financial problems according to the latest quarterly Red Flag Alert issued by Begbies Traynor, the UK's leading business recovery specialist.

In the West Midlands, there were 7,762 companies facing significant problems in the fourth quarter of 2010, compared with 6,982 in the third quarter and 8,544 a year ago. There were 152 facing critical problems, compared with 147 in the third quarter and 233 last year.

John Kelly, regional managing partner at Begbies Traynor's Birmingham office, warned that there was evidence of an increase in action from trade creditors.

"We have yet to see the full impact of public sector cuts and tax rises, but this increase in action by trade creditors will combine to put more and more pressure on struggling businesses," he said.

Nationally, the picture is even worse with almost 148,000 companies experiencing "significant" or "critical" financial problems. The figures show the first year on year increase for seven quarters - a four per cent increase in the fourth quarter of 2009 and a 20 per cent increase from the third quarter of 2010.

Those with "critical" problems owe more than £52.7 billion to creditors, suppliers and service providers.

There has been a 24 per cent increase since the third quarter with more than 61,000 struggling companies in the industries exposed to public sector spending.

The retail sector has seen a 17 per cent increase with over 10,000 struggling businesses since the third quarter with the wholesale sector experiencing the largest rise in distress, up 30 per cent.

John Kelly said: "Today's figures show that UK businesses are demonstrating real signs of distress and that trade creditors are both losing patience with their debtors and in need of collecting cash in to their own businesses.

"Coming against a backdrop of the largest decline in house prices for a year, higher inflation, an accelerated decline in business confidence and higher unemployment forecast for 2011, these figures indicate the renewed challenges facing business across most industries in 2011, particularly in the SME sector.

"After seven quarters of declines in the levels of financial distress, these figures show the first evidence of a hardening of creditor attitudes and the real strain being felt by UK companies at this point in the cycle.

"It is likely that many of these 'problem' businesses will reach informal arrangements with creditors or will be proactively managed by the banks and restructuring experts outside of formal insolvency. 

"However, given historical experience, these higher levels of distress would typically be expected to translate into a ten per cent or greater rise in formal insolvencies in 2011 (compared to an estimated 15% per cent decline in 2010), due to hardening creditor attitudes, the impact of public sector cuts and the gradual unwinding of government support measures.  This could mean a rise from around 21,500 insolvencies in 2010 to more than 23,500 in 2011.

"For smaller businesses, we are entering the darkest hour before the dawn as they face the dual challenges of weak domestic demand and greater pressures from larger competitors and business customers looking to preserve their own profitability. As such, it will be smaller businesses that bear the brunt of an increase in formal insolvencies."

For more information about Begbies Traynor, please visit their website here: www.begbies-traynorgroup.com