Interest rate rise would hit 1 in 3 businesses in North

By June 25, 2014Finance, News

Nearly one in three businesses (29%) in the North would be in financial difficulty if interest rates rise by 1% or more in the next 18 months, according to a report by insolvency trade body R3.

The findings come from R3’s latest Business Distress Index, a long-running survey of business owners and directors.

Richard Wolff, North West regional chair of R3 and Head of Corporate Recovery and Insolvency at JMW Solicitors in Manchester, said that despite the economic recovery over the last year, the figures show that not all businesses are out of the woods yet.

“A period of economic recovery is just as tough a time for some businesses to negotiate as a recession, if not tougher,” 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.”

Richard Wolff added: “A 1% rise in interest rates is at the upper limit of what we might expect in the next eighteen months. However policymakers should certainly bear in mind that many businesses still feel that they are close to the edge of their financial comfort zone.”

16% of businesses questioned 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.

“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,” added Richard Wolff.

“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.”

 

 

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