One in two Scottish technology companies at higher than normal risk of insolvency

Just over half of all technology and IT companies in Scotland are at higher than average risk of insolvency in the next 12 months, according to new research from insolvency and restructuring trade body R3.

The percentage of IT companies in the negative band (50.1 per cent) in June 2018, equating to 5,600 firms, is a steep rise from the same month last year, when a third (33.5 per cent) of Scotland’s tech firms were judged to be at higher than average risk. For the UK overall, 47.9 per cent of companies in the tech sector fell into the negative band in June 2018, up from 33.6 per cent a year ago.

The picture was brighter for transport and haulage businesses in Scotland, where 35.1 per cent of companies fell into the negative band, and for construction (40.8 per cent). For both notoriously volatile sectors, Scotland’s proportion of companies deemed at greater than usual risk was lower than for the UK overall (43.9 per cent for transport/haulage and 42.9 per cent for construction).

Nearly 79,000 out of the 232,000 businesses registered in Scotland fell into the negative band in June, meaning one in three (34 per cent) of Scottish companies are judged to be at greater than usual risk of insolvency within the next year, a figure which compares favourably with the proportion for the UK of over two in five (40.9 per cent) of companies.

Tim Cooper, Chair of R3 in Scotland and a partner at Addleshaw Goddard in Edinburgh, said: “Although R3’s research indicates that a high proportion of Scottish tech firms are at greater than normal risk, there’s no need for panic in the Silicon Glen. For one thing, the technology and IT sector across the whole of the UK has the second-highest percentage of companies in the negative band out of all the sectors monitored by R3, behind professional services, so this is certainly not an issue confined to Scottish companies.

“Another factor to keep in mind is that it is young businesses which are at greatest risk of insolvency within their first few years, and the tech sector is renowned for its number of start-ups – not all new ideas succeed, while within the sector there is a strong ethos of trying something new if a previous venture doesn’t work out.

“Scotland’s tech scene is supported by our network of world-class universities, providing a ready supply of qualified and talented graduates, and our strength in financial services, meaning that entrepreneurs need not uproot themselves in order to access funding.

“In order for a tech company to survive and thrive, it needs more than just a great idea for an app or a gadget – founders need access to skills in areas such as people management, strategy, and credit controls. Luckily, if their skills lie in coding, not accounting, they can turn to professional advisors to plug gaps in their knowledge and ensure their businesses are on a firm footing for the future.

“The sooner that any company in any sector seeks expert advice when it hits a bump in the road, the better its chances of survival, and it never hurts to have an objective outside view of what happens within a business.”

The figures are from R3’s latest insolvency risk tracker. The tracker is compiled using Bureau van Dijk’s ‘Fame’ database and measures companies’ balances sheets, director track records and other information to work out their likelihood of survival over the next 12 months.