While retailers battle with a rise in insolvencies, company debt reaches record-high levels. In a bid to improve investment opportunities, business owners have paid dividends on credit. This has subsequently placed British companies in a precarious position, as they find themselves unable to pay creditors and falling into financial distress.
According to an annual Debt Monitor report by financial administration company, Link Asset Services, net debt has jumped by £123 billion over the past three years and has now reached an overall total of £391 billion. The report further revealed companies had paid their shareholders £263 billion in dividends, despite profitability being squeezed across sectors.
The current state of business finances has now surpassed the financial crisis, where net debt reached an overall total of £285 billion. Significant changes need to be made if companies hope to prevent even greater insolvencies and further company restructuring procedures. At the Credit Protection Association, our credit management products protect our Members from bad payers and stubborn residual debt, that could derail their financial future.
The surge has been driven by an improving economic backdrop over the past few years and larger equity holdings, making a higher debt burden more affordable.
Justin Cooper, chief executive of Link Market Services, said: “Two years ago, corporate borrowing soared higher, gearing levels approached those seen just before the credit crunch, and company profitability was still in the doldrums. Investors had good cause to be concerned, particularly as the interest rate cycle was primed to turn upwards again.
“Now, healthy global growth means higher profits. That has both brought gearing levels down and means that interest costs and dividends are much more comfortably covered by profits. What’s more, companies are less dependent on short-term borrowings than at any time in the last ten years.”