Businesses would struggle if interest rates rise

A new report by insolvency trade body R3 has revealed that as many as one-in-five businesses might find themselves in difficulty if interest rates were to rise by at least one percentage point in the next 18 months.

The findings from R3’s latest Business Distress Index, a long-running survey of a nationally representative sample of 500 business owners and directors, showed that while many businesses have recovered from the recession, not all businesses are safe from a potential rise in the Bank of England’s base rate.

According to the R3 report, six per cent of UK businesses say they would be put into “serious” financial difficulty were interest rates to rise over the next 18 months, while 16 per cent said they would be put into “some” difficulty.

The President of R3, Giles Frampton, said: “Economic recovery is just as tough a time for some businesses to negotiate as a recession, if not tougher. Normally, insolvencies peak after a recession, but we haven’t seen that this time around.

“Record low interest rates and high levels of creditor forbearance have helped keep lots of businesses going.

“The good news is that some businesses that might have expected to struggle after 2008 have been given extra time to put their finances in order.

“However, there is still a big chunk of businesses that will struggle once “normal” recovery conditions, like rising interest rates, return.”

Giles Frampton added: “A one percentage point rise in interest rates is at the upper limit of what we might expect in the 18 months, but policymakers should bear in mind that many businesses still feel they’re close to the edge of their comfort zone.”

The research also showed that more than two-thirds of businesses were relaxed about the prospects of an interest rate rise, with 70 per cent saying they would be unaffected, while a further seven per cent of businesses believe they would actually benefit from an interest rate rise.

“Businesses may be expecting their bank to absorb any interest rate rises – banks have not been applying nearly as much pressure on their business customers when it comes to basic business lending as they were after the early 90s recession,” said Giles.

“Also, given how consistent speculation about rate rises has been in the last few months, many businesses will be planning ahead anyway.

“An interest rate rise will have the biggest impact on “zombie businesses” – those that are already only paying the interest on their debts – and personal finances.”

Link: Business Distress Index