Company insolvencies are forecast to rise sharply this year as the chill wind from the financial crisis hits businesses in the wider economy. Smaller companies are likely to suffer most because of a slowing economy and increasing costs to borrow in a deteriorating business environment following the credit squeeze.

Insolvencies are forecast to rise to 13,492 next year – an 8.3 per cent increase on this year – the highest annual rate since 2003, when the economy was suffering from the aftershocks of the dotcom crash, according to Euler Hermes, the world’s leading insurer of credit taken on by companies.

Fabrice Desnos, chief executive of Euler Hermes’ UK arm, said: “The problems in the markets started out as very much a financial crisis with no implications for the real economy, but now we are seeing serious consequences for businesses in a range of sectors.

“The expected slowing of the economy next year and the rising cost of finance is a big factor, but we are also seeing an increase in late payments by companies, for example, to suppliers, which is an early sign of insolvencies to come.

“According to our latest figures, payment delays are close to five-year highs, with companies on average 22 days late to pay a supplier or other trade creditor. However, it must be stressed this is against a backdrop, until the summer, of a very benign economic climate.”

Euler Hermes warns that the construction and services sectors may be the biggest casualties. It forecasts economic growth to slow from 3.1 per cent last year to 2.0 per cent this year.

A separate survey by Euler Hermes of 300 finance directors reported the rise in payment delays, an indicator of potential trouble. Martyn Gregory, corporate finance partner at the accountants Deloitte & Touche, said: “Smaller companies are more vulnerable to tougher credit conditions, partly because they are more highly geared. The Bank of England believes that the ratio or debt to assets is about 75 per cent for small firms, twice that for large companies.”

Ian Stewart, associate director of research at Deloitte, added: “Smaller companies are more dependent on debt and on the UK economy than their larger peers. The implication is that tighter credit conditions and slower UK growth will hit smaller firms harder than larger businesses. Distress in smaller firms may be the first sign that the credit crunch is really biting in the corporate sector.”

A report from the Institute of Credit Management, conducted by the Credit Management Research Centre, warns that one in 50 businesses will be insolvent within two years. Professor Nick Wilson, chair in credit management at Leeds University Business School, the author, said: “The relatively high levels of indebtedness in the corporate sector coupled with recent interest rate increases and a decline in business confidence suggest that corporate insolvencies are set to increase by more than 20 per cent in the next two years.”

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