150,000 public contractors 'at risk'

The worst may be yet to come for small companies supplying the public sector, particularly if they were born in 'the noughties' or the decade before.

Issuing the alert, insolvency experts said business failures tend to peak after a recession's end and, today, the younger firms are the most reliant on public contracts.

Although the supporting figures from R3, the insolvency trade group, are not IT-specific, they are based on service sector firms with turnover of between £50,000 and £1m.

More than a third of the 301 firms the group polled said their business was reliant on state contracts, signalling that the fallout from government cuts will be widespread.

Concentrated among firms that began in the 1990s or 2000s, the reliance on the public sector has increased in recent years, R3 said, and is lowest for start-ups from 1980.

But of those firms with a dependency on the state, nine out of 10 of said they expected some hit on their business, mainly relating to profits, if their contracts cease.

A smaller but still "significant" number added they would have to scrap expansion plans, R3 found, while a further 14% planned to consider job losses, assuming their contracts suffered the same fate.

Even more worrying for the economy, of the firms that stand to be affected if their work is cancelled, 37% predicted serious financial trouble, and 32% expected worst - possible insolvency.

When factored into national figures, this means that between 150,000 and 173,000 small businesses are vulnerable to collapse should they lose their public contracts.

"It is of course highly unlikely that all public sector contracts will be withdrawn and the figure of 150,000 business failures would represent a worst-case scenario.

"Yet...businesses need to be aware of this risk and seek professional advice before this reliance on public sector work threatens" them, said R3's president Steven Law.

In line with first half-year insolvency data, the August reading confirms that overall business failures have not yet climbed as high as the industry trade body had feared.

This is partly due to historically low interest rates and Time to Pay from HM Revenue & Customs, Law said, but it may also be down to business owners taking preventative steps.

He believes that shifting the balance of their contracts, or diversifying, in favour of private or voluntary clients is how firms facing the public sector can survive, and even thrive.

But tempering the optimism, R3 warned: "Trends from previous recessions suggest that insolvencies continue to rise after a recession officially ends, culminating in a 'peak' some time afterwards.

"In short, the worst may in fact be yet to come as the recession's aftermath continues to take its toll on struggling businesses."

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