Restaurants and cafés across the UK are going insolvent at a pace not seen for more than a decade.
A total of 3,347 eateries have been unable to pay their debts in the past two years to March 2023, according to data from the Insolvency Service.
During the first three months of 2023, an average of six restaurants were affected every day.
Businesses declare insolvency when they are unable to afford the repayments for their debts. Of those restaurant declared insolvent, 98% of cases have ended with the business being shut down.
Interest rates have been rising since December 2021 as part of the Bank of England’s effort to quell inflation, raising the costs businesses and households must pay to borrow money.
According to the Bank of England, companies facing interest payments of more than 40% of their annual revenue are “materially more likely to experience repayment difficulties”.
By the end of this year, the share of medium-sized companies beyond that threshold is expected to hit 70% – the highest share since 2009.
“Insolvencies are likely to rise further, as pressures caused by higher interest rates and the relatively subdued economic outlook continue to feed through,” the Bank said in a report on Wednesday.
Interest rates on new loans for small and medium-sized businesses (SMEs) have more than doubled in the past year, rising from an average effective rate of 3.4% to 6.9%.
That’s similar to the rise in interest rates on new mortgages. But while 88% of mortgage holders are protected by fixed-rate deals, just 29% of SME borrowers are.
As a result, the rise in interest rates has had a much more pronounced effect on SME borrowers, with average interest rates on existing debt rising from 3.2% to 5.6% in the past year (compared to a rise from 2.1% to 2.8% for the average mortgage-holder).
Sky News analysis, based on addresses recorded in company filings, shows how restaurants across the country have been unable to service their debts.
You can explore the effect on your area using the map below.
Restaurants shown as undergoing liquidation (98% of the total) are set to be closed down, though some may remain open for the time being.
Why are so many restaurants going insolvent?
Data collected by industry lobby group UK Hospitality shows the number of restaurants in Britain has declined by 3,415 since March 2020 – a fall of 18%.
“We’re really facing a perfect storm,” says UK Hospitality CEO Kate Nicholls.
“These businesses faced a challenge going through COVID, and as a result of that they’ve got very high levels of debt. So, interest rate rises have impacted on their ability to remain viable.”
Small and medium-sized businesses accrued significant debt during the pandemic as lockdowns forced high streets to close and cut off access to international tourists.
The total stock of debt owed by the UK’s SMEs rose by 15% in the three years to May. Among hospitality firms, who were particularly impacted by lockdown restrictions, the increase was 21%.
Matt Howard, head of insolvency and recovery at accountancy firm Price Bailey, says that a small increase in interest rates can be an “awful lot of money” for a business with a large amount of debt.
“My experience is that this sector has always been fairly highly leveraged,” he says.
“We’ve dealt with some businesses in the past that have spent many millions fitting out high profile venues. And all the COVID support that was available, which provided a lifeline to a lot of businesses in this sector – that money needs to be paid back, too.
“If you’re now facing paying back at a much higher rate, then that will eat into your margins significantly. A lot of businesses in hospitality are hovering around break even. They’re turning over perhaps enough to pay the rent and the staff and the suppliers, but that’s about it.”
Venues across the hospitality sector have been closing at a rapid pace. The number of guest houses, including traditional bed and breakfasts, has fallen by 38% since before the pandemic. The number of nightclubs is down by almost a third.
The impact has been felt across Britain. Aberdeen has lost a fifth of its hospitality businesses since March 2020. During the first three months of this year, Brighton lost an average of 24 venues every week.
“Half the sector is still trapped in a very high energy contract taken out at the peak of the market in the second half of last year,” says Kate Nicholls of UK Hospitality.
“Energy costs for small restaurants have gone from being 4% of turnover to 14% of turnover. And that’s often happened overnight, and it just means they can no longer make a profit. So, you’ve got a third of the sector trading at or below break-even.
“We need the government to be working with Ofgem and the energy companies to bring down energy prices to more reasonable levels more rapidly.”
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