R3 warns over impact of interest rate hike

NEARLY a third of companies in the North would be in financial stress if interest rates rose significantly – by 1% or more – in the next 18 months, according to research from insolvency body R3.

Among those hardest hit would be ‘zombie businesses’ – those already struggling to make ends meet, even with interest rates at their historic low of 0.5%.

Richard Wolff, North West regional chair of R3 and head of corporate recovery and insolvency at Manchester law firm JMW said that despite the economic recovery it was clear that not all businesses are out of the woods yet.

He said: “Normally, insolvencies peak after a recession but it’s fair to say that we haven’t seen that this time around. Extremely low interest rates and accompanying high levels of creditor forbearance have helped keep lots of businesses going that in past recessions would have gone insolvent.

“The good news is that some businesses that might have expected to struggle following the financial crisis of 2008 have been given a significant amount of extra time to put their finances in order. However, there is still a sizeable proportion of businesses that will struggle once ‘normal’ recovery conditions, such as rising interest rates, return.”

Mr Wolff said a 1% hike in rates is at the “upper limit” of expectations withing 18 months.

R3 surveyed 500 company owners and directors for its Business Distress Index, around 100 run businesses in the North.

It found that: 16% of businesses said that they would be in serious difficulty if interest rates rose whilst 13% of them would be in ‘some difficulty’. However 58% said that they would not be affected by a rate rise and 11% would stand to benefit
Mr Wolff said: “Businesses may be expecting their bank to absorb any interest rate rises and it would seem that 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,”

“An interest rate rise will no doubt have the biggest impact on ‘zombie businesses –  those only paying the interest on their debts – and personal finances.”