Businesses unable to cope with interest increases, research shows

One in 25 businesses would be unable to pay off its debts if the interest rates were to increase, research from insolvency trade body R3 has shown.

Some 79,000 (4%) UK companies said that a small increase would affect them financially, almost a quadrupling (20,000) of figures from previous research in September 2016.

The research, which is part of a long running survey of business distress by R3 and BDRC Continental, also found that 96,000 firms (5%) were just paying interest on their debts.

Andrew Tate, spokesperson for R3, said: “This is the first increase in the number of businesses worried they would be unable to cope with an interest rate rise since 2014, and it coincides with a period of slower than expected growth and a small rise in corporate insolvency numbers.

“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.”

Tate also said that businesses which were only paying the interest on their debts were a “common characteristic” of a “zombie business” – a company only able to keep going because of “an ultra-low cost of borrowing and with little chance of survival.”

Tate added: “The 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 last year.”

The figures also suggested that overall, levels of distress among businesses were low with just 1% of businesses were struggling to repay its debts, a drop from 2013’s figure of 8%. Just 7% of businesses reported a decrease in profits, whilst just 2% had to make redundancies.