The first half of 2025 has proven a testing period for UK small and medium-sized enterprises (SMEs). Despite initial hopes of post-inflation stability and a rebound in business investment, the latest insolvency figures continue to highlight fragility across key sectors. Yet beneath the pressure points, there are also signs of resilience and opportunities for early intervention, financial review, and structured risk responses.

According to the latest data from the Insolvency Service, over 12,400 companies entered insolvency between January and June 2025, with a notable concentration of cases in retail, construction, and hospitality. While this number represents a plateau rather than a spike, it remains significantly above pre-pandemic levels and highlights the continued squeeze on SMEs.

A challenging start to the year

The economy has continued to grow during the first half of the year, although the expansion remains fragile.

Headline inflation, as measured by the Consumer Prices Index (CPI), has fallen from its 2023 highs but remains sticky. The CPI rose by 3.4% in the 12 months to May 2025, only marginally down from 3.7% in February. For many businesses, particularly those operating on tight margins, this prolonged inflationary environment continues to drive up wage expectations, supplier costs, and utilities - all against a backdrop of cautious consumer spending.

Hospitality businesses now face increased employer National Insurance contributions and a higher National Minimum Wage, adding further pressure on payroll-heavy operations. Retailers are having to confront similar challenges, especially as the reduction in business rates relief (from 75% to 40% in April) begins to truly bite, and customer spending remains muted - with price sensitivity at a near-decade high. For many households, the cost of living crisis remains very real.

In construction, volatility in input costs and contractual delays persist, with insolvencies disproportionately affecting subcontractors and smaller developers. Rising material prices and a tight labour market have led to more frequent budget overruns, creating cash flow difficulties and strained creditor relationships.

Why early warning signs matter

For many SMEs, insolvency does not arrive as a sudden shock - the signs are often visible months in advance. Businesses across distressed sectors often experience cash flow pressure, mounting tax arrears, and increased creditor demands - some of the earliest indicators of financial strain. As soon as these warning signs emerge, it is important that the leadership team engage with expert professionals who can help the firm navigate the challenges.

One trend affecting construction, retail, and hospitality alike is the growing length of debtor days. Payment delays from clients and customers have become increasingly common, making short-term liquidity harder to manage. As a result, even otherwise profitable businesses may struggle to meet obligations. The government is currently undertaking a consultation on this issue of late payments - with the results expected towards the end of the year. The expectation is that the government will set a 60-day limit on payment terms, potentially reducing to 45 days at a later date. Currently late payment costs the UK economy over £10 billion a year and affects over 1.5 million businesses, so is an issue that requires investigation and remedy. However, it's important to note that the one size fits all approach may not suit all businesses, or industries. It is an issue that all organisations should be aware of.

Boards must now treat credit control, debtor management, and supplier negotiations as strategic priorities - not merely operational tasks. When handled proactively, these areas can help avoid crisis scenarios. Left unchecked, however, they can accelerate a business's decline into distress.

Responding with structure

The businesses best positioned to navigate the second half of 2025 will be those with the agility to respond to change and the discipline to maintain financial oversight. This requires a structured approach, including robust forecasting and scenario planning that tests assumptions around sales, inflation, and interest rates to identify vulnerabilities.

Seeking timely input from restructuring professionals is also key, enabling companies to explore informal options such as Time to Pay arrangements, refinancing opportunities, or managed exits before issues escalate.

Strong board-level oversight of liquidity and covenant compliance remains essential, supported by regular stress testing of financial metrics to ensure businesses stay within acceptable risk parameters. Meanwhile, maintaining clear and consistent communication with stakeholders - whether lenders, landlords, or employees - helps preserve confidence and minimise reputational or operational disruption.

Where these disciplines are embedded early, businesses are more likely to avoid formal insolvency. The organisations that take a proactive approach are often better positioned to regain control, renegotiate where necessary, and refocus operations toward long-term profitability.

Opportunities amid volatility

While insolvency rates remain high, they are not indiscriminately spread. Many SMEs have shown that adaptation and even growth remain possible amid challenging conditions. In hospitality, operators have shifted to leaner, more flexible staffing models and adopted data-driven pricing strategies. In retail, integrating e-commerce platforms and consolidating supply chains has helped some firms reduce overheads and improve cash generation.

There are also signs that the broader macroeconomic environment may ease in the second half of the year. Further interest rate reductions are possible before year-end, potentially improving credit conditions for SMEs. The new Government has pledged to expand access to SME finance and simplify certain regulatory processes - though delivery will need to match the rhetoric.

Insolvency can be a turning point

One of the most important messages for SME leaders is that insolvency, where it occurs, need not mean closure. Company Voluntary Arrangements (CVAs), pre-pack administrations, and business sales can provide continuity and protect viable operations. For those acting early, restructuring can often offer a pathway to survival and even renewal.

Insolvency rates in 2025 may remain elevated, but with sensible planning, strategic cost control, and the right advice, many businesses can avoid becoming part Gof those statistics - and instead emerge stronger and more focused.

The message to all businesses is clear: while market conditions remain difficult, the tools to manage risk are available. Waiting until crisis hits narrows options - but acting early keeps them open.

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