Insolvency body warns many West Midlands companies would be hit by interest rate hike

A RISE in interest rates within the next 18 months would leave one in five Midlands businesses struggling with their finances, according to a new report.

The findings from insolvency trade body R3’s quarterly Business Distress Index show that 21% of companies in the region would be put into financial difficulty if interest rates were to rise by at least one percentage point before the end of 2015.

The survey echoes R3 Midlands’ earlier warnings that indications of an economic upturn should be viewed with caution and that a significant number of businesses remain financially vulnerable.

R3 Midlands Chairman Richard Philpott, a partner at KPMG in the region, 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 many businesses to continue to trade.

“Whilst this has given rise to a sizeable number of ‘zombie companies’, only able to pay interest on their debts and thus highly vulnerable to interest rate rises, other businesses that might have expected to struggle after 2008 have been given extra time to put their finances in order.”

R3 said it believed that many of those surveyed who say they would not be affected by a rise in interest rates may be expecting their bank to absorb the increase.

“Banks have not applied nearly as much pressure on their business customers regarding basic business lending as they did after the recession in the early ‘90s,” added Philpott.

“Also, given the consistent speculation about rate rises in the last few months, many businesses will already be planning ahead for such an eventuality.”