Finance · 5 June 2017

Interest rates rise could financially ruin one in 25 businesses

interest rate
Base interest rates are currently at a low of 0.25 per cent

One in every 25 UK businesses – the equivalent of some 80,000 firms – would be unable to repay debts if interest rates rise by just a small amount, research has shown.

The figure, representing around four per cent of British companies and including thousands of small and micro enterprises, is almost four times the number of businesses that were in a similar financial situation six months ago.

The research, conducted by R3, the UK’s insolvency and restructuring trade body, revealed that around 96,000 companies – five per cent of all businesses – were currently just paying interest rates on their debts, caused predominantly by the increasing costs of running a business.

Commenting on the statistics, Andrew Tate, a spokesperson for R3, said: “This is the first increase in the number of business owners worried they would be unable to cope with an interest rates rise since 2014, and it coincides with a period of slower than expected growth and a small rise in corporate insolvency numbers.

Only paying the interest on debt can be a sign that a business is only able to continue trading because of the low cost of borrowing, and has little chance of surviving long-term.

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

Despite the increase in the number of UK companies unable to afford a future interest rates rise, the research showed that the number of businesses showing signs of serious financial distress is falling.

Around 25,000 business owners have said they’re struggling to cope with debt repayments when they fall due, down from a high of 134,000 business owners in mid-2013.

Meanwhile, the number of business owners having recently had to renegotiate payment terms with their creditors has dropped from 166,000, at the end of 2013, to 56,000 – three per cent of all firms.

Tate went on to say: “While it’s positive that signs of acute distress continue to fall, it’s no reason to be complacent. 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. Some company owners are starting to find their room for manoeuvre increasingly limited.”

Small business receives boost from historic Bank of England interest rate cut

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ABOUT THE EXPERT

Fred Heritage is deputy editor at Business Advice. He has a BA in politics and international relations from the University of Kent and an MA in international conflict from Kings College London. He previously worked as a reporter at Global Trade Review magazine.

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