The legacy of the pandemic and its inflationary aftershocks are expected to lead to a surge in company failures across Scotland in the coming months, according to a leading corporate rescue and restructuring specialist.

Ken Pattullo, managing partner for Begbies Traynor in Scotland, said rising costs and higher interesrt rates mean "time is simply running out" for many firms that are also saddled with repayments on Covid support loans taken out during the pandemic. His comments come as latest figures from Begbies Traynor show a 6.3% increase in the number of Scottish businesses experiencing "significant" financial distress during the second quarter of this year.

“Businesses are facing a perfect storm of challenges – as they struggle to recover from the catastrophic impact of the Covid pandemic, they are also now having to find funds to repay bounce back loans during the worst cost of living crisis in living memory," Mr Pattullo said. "What’s more, interest rates are continuing to increase leading to unmanageable debt, and material and labour costs are also continuing to spiral along with rising inflation, the impact of the conflict in Ukraine and higher energy bills.

READ MORE: Scottish economy sees slow and fragile growth

“In the midst of ongoing economic uncertainty, many businesses feel they are at the end of the road and simply cannot afford to continue trading. While companies in Scotland appear to be performing slightly more strongly than those across the UK, for many, time is simply running out and we expect to see a surge in company collapses in the coming months."

The Red Flag Alert from Begbies Traynor classifies businesses in significant distress as those showing deterioration in key financial ratios and indicators such as working capital, contingent liabilities, retained profits and net worth. The 6.3% year-on-year rise in Scottish businesses falling into this category compares to an 8.5% increase across the whole of the UK.

Compared to the previous three months, Scotland’s level of significant distress increased by slightly more than 1%.

READ MORE: Economy resilient in short term but growth remains fragile in 2023

Of the 22 sectors monitored in Scotland, just three reported decreases in significant financial distress compared to the second quarter of last year: printing and packaging (-26.9%); manufacturing (-2.2%); and telecommunications and IT (-0.4%). Sectors suffering the biggest increases in significant distress included: utilities (+19.8%); leisure and cultural activities (+19%); financial services (+16.7%); real estate and property (+15.6%); and travel and tourism (+14.7%).

Across the UK as a whole, early distress rose by 3.7% since the previous quarter. Of the 438,702 businesses across the UK suffering from early distress in Q2 2023, more than 20,800 were in Scotland.

“While the prospect of the UK economy officially entering recession seems to be diminishing, it appears to be stagnant at best," Mr Pattullo added. "In the face of increasing energy prices and higher interest rates to curb inflation, we are certainly not out of the woods yet.

READ MORE: Scotland economy: Growth slows as manufacturing falls

"The impact of rising mortgage and loan repayments puts consumer-facing businesses at particular risk as people tighten their belts."

Latest official figures show that inflation fell by more than expected in June to 7.9%, down from 8.7% in May and its lowest rate since March 2022. However, this is still well above the Bank of England's (BoE) target of 2%, with food currently the primary driver of inflation.

Meanwhile, interest rates are now at their highest since March 2008 following the 14th consecutive rise by the BoE earlier this month to 5.25%, increasing the cost of borrowing money and adding pressure to both households and businesses.

Figures out yesterday from the Royal Bank of Scotland showed business activity across the country's private sector fell from 53.2 to 51.1 in July, signalling a slowing of growth but above the level of 50 deemed to separate expansion from contraction. Scotland ranked fifth among the 12 UK nations and regions monitored by the bank's purchasing managers' index, down from third place in June.