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Businesses to struggle if interest rates rise

  • 28/06/2017
  • Mike Padmore

A report has shown that if interest rates rise, even by a small amount, 79,000 of UK businesses say they would be unable to repay their debts – this is according to new research by insolvency and restructuring trade body R3. This figure is almost four times the amount of businesses in the same situation in September 2016.

The research has been part of a long-running survey of business distress by R3 and BDRC Continental who also found that 96,000 firms (5%) were just paying interest on their debts.

Andrew Tate, a spokesperson for R3 said “UK firms have faced a challenging 2016 and early 2017: the sharp fall in the pound has made things difficult for importers, while a rising National Living Wage and the roll-out of pensions auto-enrolment have added to businesses’ running costs.”

He added: “Only paying the interest on debts is not necessarily a sign that a business is in distress: it may be that a company is taking advantage of low rates to invest in its operations or assets. But only repaying the interest is also a common characteristic of a ‘zombie business’ – a business only able to keep going because of an ultra-low cost of borrowing and with little chance of survival.

“The research shows that there are tens of thousands of firms currently walking a very tight line. Rising inflation may also lead to a double-whammy for struggling businesses: it may increase the chance of the Bank of England raising interest rates, and it would undermine the consumer spending that has driven the economy over the last year.”

Even though research shows that the number of businesses unable to afford an interest rise has increased, the number of businesses showing signs of serious financial distress is actually falling.

Andrew Tate commented “While it’s positive that signs of acute distress continue to fall, it’s no reason to be complacent. The latest GDP growth figures were lower than expected, while a healthy business’s finances can deteriorate rapidly depending on external factors, such as the cost of inputs or the failure of key customers or suppliers. And as the other statistics in the research show, some firms are starting to find their room for manoeuvre increasingly limited.”

How you can protect your business

With more and more companies struggling to pay off debts, make sure you protect your business by running thorough credit reports on everyone you provide credit for.

For UK companies CoCredo credit reports include a mortgages and charges section that will detail any outstanding charges that are pending against the business.

One sizeable late payment from a company can have a huge knock on effect for your business. It’s also advisable from the evidence shown that you should continue to monitor these companies in view of the rise in interest rates. Having these simple measures in place can save you from bad debt. Monitoring starts from as little as £16 for 12 months. Call 01494 790 600 to find out more.