The UK economy is showing signs of recovery according to research by Begbies Traynor, which shows a 39% drop in levels of 'critical' financial distress among UK business.

The firm's Red Flag Alert shows that across all sectors, 'critical' financial problems reduced from 4,947 in Q2 2012 to 3,001 in Q2 2013, the second highest year-on-year decrease since the start of 2011. On a quarterly basis, the improvement continued with levels of 'critical' distress falling 9% from 3,283 in Q1 2013.

The number of UK businesses experiencing significant levels of financial distress is also improving, but at a slower rate, reducing 18% year-on-year from 216,396 cases in Q2 2012 to 176,677 in Q2 2013, and on a quarterly basis falling 7% from 190,787 in Q1 2013.

Professional services headed the list of sectors reporting the biggest reductions in 'critical' financial distress during the period, down by 59%, followed by construction (48%) and financial services (30%).

However, Begbies Traynor warns that many SMEs face serious financial difficulties as they are at risk of running out of cash.

Ric Traynor, executive chairman of Begbies Traynor Group, said: 'A new breed of chronically under-funded businesses may hold back the economy's growth unless proper guidance is provided to this group of financial crisis survivors. Key to their survival will be improving the funding gap for SMEs and providing greater training for business leaders.'