One in 20 businesses unable to pay debts if interest rates rise

Some 30,000 Midlands businesses (5%) say they would be unable to repay their debts if interest rates were to rise by a small amount, according to a new report by the Midlands branch of insolvency and restructuring trade body R3.

R3 says this is “a significant and sizeable” increase from the less than 1% of local businesses R3 recorded as in this situation in September 2016.

The research, part of a long-running survey of business distress by R3 and BDRC Continental, also found that 12% of Midlands firms were just paying interest on their debts, a notable rise from 9% last September.

R3 Midlands chairman Chris Radford, a partner at Gateley in Nottingham, said: “These local figures reflect the national picture and indicate the first increase in the number of businesses worried they would be unable to cope with an interest rate rise since 2014. R3’s findings coincide with a period of slower than expected economic growth and a small rise in corporate insolvency numbers.

“Midlands 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.”

Radford points out, however, that only paying the interest on debts does not always indicate that a business is in distress.

He said: “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’. This is a business only able to continue trading due to an ultra-low cost of borrowing and with little chance of survival.

“The R3 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 past year.”