Thousands of UK IT SMEs in financial distress with 185,000 jobs at risk

About 47,000 small tech companies in the UK are suffering significant financial stress after 18 months of Covid-19 disruption, putting 185,000 jobs at risk.

The figures, from business rescue and recovery business Begbies Traynor, are for the second quarter of this year and reveal a 41% increase in IT small and medium-sized enterprises (SMEs) in significant financial distress since the first lockdown.

According to data from the company’s Red Flag statistics arm, which monitors warnings signs that companies could be in trouble, thousands of tech SMEs are now categorised as being in severe distress.

Shaun Barton, national online business operations director at Real Business Rescue, part of Begbies Traynor Group, said the tech industry had been “on a high” before Covid-19, but the disruption caused by the pandemic had slowed things down. During the past 18 months, Begbies Traynor has been involved in the liquidation of 109 UK tech SMEs.

“When you look at 2020, everything was looking rosy,” said Barton. “Even at the start of the first lockdown, there were lots of job offers in UK tech and lots of venture capital interest. It was probably the second lockdown when the numbers of IT SMEs in distress began to increase.”

Smaller tech SMEs, including startups, had been hit the hardest, he said. “They want to invest, but they just don’t have the money and getting funds is really difficult at the moment.”

Figures from Begbies Traynor show that the number of startup IT firms set up after 2017 that are in significant financial distress has increased by 37% in the last quarter because of the pandemic. There are now 9,289 of these young businesses in distress, compared with 6,779 at the end of 2020. At the start of the first lockdown last year, there were 3,732 in distress.

Things are much worse now than at the start of the first lockdown because of the knock-on effect of slumping sales across the world and because large companies are preserving their cash.

There are also challenges for small companies to get their messages across to potential customers, with the lack of face-to-face meetings and events hitting SME tech companies that rely on these to win business.

Barton said that in contrast, larger tech companies have taken advantage of the lockdowns because they have been able to transform. He said the rapid increase in take-up of the latest technologies such as remote working systems, as businesses attempted to operate during the Covid-19 lockdowns, has also benefited larger tech companies, mainly global tech firms with a footprint in the UK.

Looking beyond IT firms in the SME sector, Begbies Traynor’s numbers show that in the overall UK SME sector, 713,000 companies are now in significant financial distress, a 15% increase on the figure at the end of 2020.