Interest Rate Rise May Cause Problems for Businesses

New research has revealed that as many as 79,000 UK businesses (4%) would be unable to repay their debts if interest rates were to rise by even a small amount. This is almost four times the 20,000 businesses that reported being in this situation in September 2016.

The study, by insolvency and restructuring trade body R3, also found that 96,000 firms (5%) were just paying interest on their debts.

“UK 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,” commented Andrew Tate, spokesperson for R3.

“Only paying the interest on debts is not necessarily a sign that a business is in distress: it may be that a company is taking advantage of low rates to invest in its operations or assets,” he added. “But only repaying the interest is also a common characteristic of a ‘zombie business’ – a business only able to keep going because of an ultra-low cost of borrowing and with little chance of survival.”

“The research shows that there are tens of thousands of firms currently walking a very tight line,” he said. “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 last year.”

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