In the UK’s thriving restaurant scene, an alarming trend is casting a shadow: surging insolvency.
From the bustling city corners of London to the quaint cafes of Aberdeen, financial turmoil is undeniable.
The economic hardships of COVID-19 and escalating interest rates from the Bank of England have become a double-edged sword, pushing many eateries to the brink.
The Surge of Insolvency in UK’s Restaurant Industry
According to the Insolvency Service, as reported by Sky News, a staggering 3,347 restaurants have defaulted on their debt payments over the last two years ending March 2023, equating to an average of six restaurants becoming insolvent daily in the first quarter of 2023.
This rate has been unmatched for more than a decade, painting a grim picture of the food industry’s health in the UK.
The Deeper Issue: Rising Interest Rates and Economic Pressures
The Bank of England’s efforts to curb inflation have led to a steady climb in interest rates since December 2021, inadvertently inflating the debt burden of businesses and households alike.
As the Bank’s report highlights, the companies devoting over 40% of their annual revenue towards interest payments are increasingly prone to repayment difficulties.
By year-end, 70% of medium-sized businesses are projected to surpass this critical threshold – a rate unseen since 2009.
The Ramifications for SMEs
Interest rates on new loans for small and medium-sized businesses (SMEs) have skyrocketed over the past year, leaping from 3.4% to a whopping 6.9%. For a context, that’s akin to the upswing in mortgage interest rates.
However, the absence of fixed-rate deals among SME borrowers – accounting for a mere 29% compared to 88% of mortgage holders – amplifies the impact.
Consequently, the rise in interest rates has dealt a harsher blow to SME borrowers, driving average interest rates on existing debt from 3.2% to 5.6% over the past year.
For the average mortgage holder, this increase has been from 2.1% to 2.8%.
Why are Restaurants Struggling?
Data from industry advocate UK Hospitality reveals an 18% fall in the number of UK restaurants since March 2020, translating to a decrease of 3,415 establishments.
But what is the driving force behind this decline?
Kate Nicholls, UK Hospitality CEO, refers to the predicament as a “perfect storm”.
High debt levels, exacerbated by the recent interest rate hikes, have strained many businesses that were already financially fragile post-COVID.
The debt burden for UK’s SMEs saw a 15% upswing in the three years leading to May.
The hospitality sector, severely battered by lockdown restrictions, witnessed an even higher hike of 21%.
Many businesses in the hospitality industry are barely making ends meet.
Rising interest rates, coupled with the pressure to pay back the financial aid received during the pandemic, are chipping away at their already slim margins.
Looking Ahead: Calls for Government Intervention and Solutions
As the situation grows dire, industry leaders are urging the government to act swiftly.
Kate Nicholls calls for collaborative efforts with Ofgem and energy companies to temper soaring energy prices, which have jumped from 4% to 14% of turnover for small restaurants.
Such intervention could be a lifeline for a third of the sector that’s currently teetering on the edge of insolvency.
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