It provides a window into how prevalent or rare financial distress is among UK businesses across 20+ key sectors. The quarterly and yearly comparisons help connect the dots between trends and track how businesses respond to fundamental legislative, regulatory and taxation changes.  

The risk of insolvency is intertwined with mortality rates, as the higher the risk of insolvency, the lower the risk of survival, unless professional intervention is sought timely. Lawrence O'Hara, a corporate insolvency adviser at Northern Ireland Debt Solutions, looks at what the Business Distress Index means for startup mortality rates.

The undeniable agility of startups

SMEs and startups are distinctly different breeds of business. While both are functional, startups stand out for their structural efficiency to rapidly adapt to economic conditions and remain resilient in the face of change.

This must be considered when analysing the overall health of British businesses. While most will see reduced bottom lines in the face of higher taxes, regulatory changes, and US tariffs, startups may well be more insulated from the impact.

The picture of startup health

Financial distress statistics from Real Business Rescue show 45,416 businesses in critical financial distress, up from 40,174 in Q1 2024, a slight 13% year-on-year increase, while significant financial distress levels saw a modest drop. This paints a mixed picture of financial health as critical financial distress levels snowball.

Startup centric analysis conducted by PwC shows that the proportion of startup insolvencies is at the lowest level in a decade. Startups accounted for 46% of total company insolvencies in 2024, compared to 60% over the last decade. This marks the first year the average proportional percentage dropped below 50%. As startup mortality rates rise, this is a juxtaposition to non-startups as their overall financial health respectively worsens.

Few fixed costs – as startups are typically non-traditional in their setup, they are less likely to commit to traditional fixed costs, such as physical premises and large employee numbers. With less input costs, startups are less impacted by inflationary pressures, such as rent and blanket wage increases, including rises to Employers’ National Insurance Contributions and National Living Wage.

Flexible operations – with flexible business operations, startups can make immediate adjustments to offset rising costs and keep their balance sheets balanced. Inflation has rapidly fluctuated in recent years, increasing cost bases for SMEs with little to no warning. Startups are well positioned to respond to adverse market conditions as their structural setup affords flexibility, which is an advantage over non-startups.

Growth potential – the growth potential of a startup is often exceptionally high, which is evident in their risk appetite and long-term ambition. As technology advances at breakneck speed, startups are highly geared to stay ahead of the curve to satisfy growth targets and investor expectations.

For every successful startup to thrive, the designated financial guardian must keep a watchful eye on key factors, such as company cash flow, debts vs assets, sales forecasts and accounts receivable.