Worrying figures in the latest Begbies Traynor Red Flag Report today show a surge in the number of firms facing ‘significant’ or ‘critical’ financial problems during the last quarter of 2010.

Construction is among the worst hit sectors according to the report which monitors the early warning signs of company distress.

Experts are predicting the figures will be followed by a 10% rise in insolvency levels this year.

The figures show the number of construction companies in trouble jumped 21% on the previous quarter to 19,167. The figure was also 8% up on levels during the same period in 2009.

Ric Traynor, Executive Chairman of Begbies Traynor Group, said: “Today’s figures show that UK businesses are demonstrating real signs of distress and that trade creditors are both losing patience with their debtors and in need of collecting cash into their own businesses.

“These figures indicate the renewed challenges facing businesses across most industries in 2011, particularly in the SME sector.

“The sectors most reliant on government spending are already feeling the impact of public sector cuts, confirming the financial effects of the recent contraction in the services and construction sectors.

“With the full implementation of budget cuts only starting to show through in these figures, public sector exposed sectors are likely to face significant increases in the level of corporate failures over the course of 2011.

“After seven quarters of declines in the levels of financial distress, these figures show the first evidence of a hardening of creditor attitudes and the real strain being felt by UK companies at this point in the cycle.

“These higher levels of distress would typically be expected to translate into a 10% or greater rise in formal insolvencies in 2011 (compared to an estimated 15% decline in 2010), due to hardening creditor attitudes, the impact of public sector cuts and the gradual unwinding of government support measures.

“The real concern is not just that the construction sector has fallen away since Q3 2010, but that it is 13% worse than a year ago, the biggest deterioration across the whole economy.

“With much anecdotal comment about below-cost pricing as contractors scrabble to secure work at any price to contribute to their fixed costs and as the boost to activity levels from Olympic projects wanes, the prospects for 2011 look very challenging.

“For smaller businesses, we are entering the darkest hour before the dawn; as they face the dual challenges of weak domestic demand and greater pressures from larger competitors and business customers looking to preserve their own profitability.  As such, it will be smaller businesses that bear the brunt of an increase in formal insolvencies.”