According to bankruptcy bureau Begbies Traynor, the construction and catering sectors were the hardest hit. Loan repayment schedules should be extended to ease the pressure, the report said.
The government said it has offered businesses an "unprecedented support package" and greater flexibility in repaying Covid loans.
According to a report by Begbies Traynor, the number of companies in financial distress rose by 19% in the first three months of this year compared to early 2021.
Julie Palmer, a partner at the insolvency and restructuring firm, said without further action to help struggling companies, a wave of corporate bankruptcy would begin.
"This is exactly the case when the dam holding it back finally breaks," she said.
Begbies Traynor, who regularly publishes reports on the state of British companies, said his Red Flag Warning investigation reflects the strain of two years of extreme financial stress on thousands of companies. It states that 1,891 companies are now in the critical category, suggesting that their prospects are unreliable.
Although Covid restrictions have been lifted, some businesses are still feeling the effects of supply chain disruptions and prices for energy and other resources have skyrocketed.
In some sectors, companies are finding it difficult to hire staff and wage costs, including the minimum wage and national insurance contributions, have risen. With the cost of living rising, many UK households are looking for ways to save money, putting even more pressure on businesses that rely on discretionary spendings, such as bars and restaurants.
“Inflation… when called the silent thief of the economy, I think she's actually becoming a sort of armed robber, with real inflation probably much higher than the [official figure] of 7%,” Ms Palmer said. There's also a "post-Brexit hangover," she said, and these factors together represent a "perfect storm" of pressure on businesses.
Begbies Traynor's investigation points to a spate of county court (CCJ) rulings, an early sign of future insolvency as they show creditors are filing lawsuits. The report states that the number of CCJs has grown by 157% from last year. Courts are effectively closed for cases so creditors can take action amid the pandemic, Ms Palmer said, and the Covid lockdown of lawsuits means CCJ's current level is likely just the tip of the iceberg. She added that landlords will be able to file lawsuits against businesses from Saturday. "We think the landlords, who are very enthusiastic lobbyists, will increase those numbers," she said.
Government insolvency figures for March also illustrate an upward trend in insolvencies. They show that voluntary liquidation by creditors, the most common way to liquidate companies, has more than doubled from last year.
In the acute phase of the pandemic, many companies depended on government support. But now that support has faded as businesses now face a veritable storm of rising wages, energy and credit costs, Begbis Trainor said.
Ms Palmer said the government was faced with a choice: “Do they want to get back the money distributed during the pandemic and ensure a functioning economy afterwards? Or [they] look for ways to reduce the number of companies going out of business. Because ministers have invested so much money in protecting companies over the past two years, they don't want it wasted when companies go bankrupt and can't pay their debts,” she said.
She said leniency or a long-term view on payments under the coronavirus business interruption credit scheme would help ailing businesses.
A government spokesman said the aid provided to businesses during the pandemic included VAT cuts, leave at corporate rates and around £400 billion in government-backed loans.
"We have given companies more flexibility in repaying their Covid-19 loans: Borrowers under the loan discount scheme can extend the repayment period by ten years and apply for credit leave," the spokesperson added.
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