One in 25 UK businesses unable to repay debts if interest rates go up
Some 79,000 UK businesses – 4% – say they would be unable to repay their debts if interest rates were to rise by a small amount, almost four times the 20,000 businesses in this situation in September 2016, according to new research by insolvency and restructuring trade body R3.
The research, part of a long-running survey of business distress by R3 and BDRC Continental, also found that 96,000 UK firms – 5% – were just paying interest on their debts.
R3 president Andrew Tate 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 has added to businesses’ running costs.
“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. But only repaying the interest is also a common characteristic of a zombie business – a firm that is 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 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 research also found that – despite a rising number of firms unable to afford a future interest rate rise – the number of UK businesses already showing signs of serious financial distress continues to fall.
Just 25,000 businesses – 1% – say they are struggling to repay their debts when they fall due, which is down from a high of 134,000 in May 2013. Similarly, the number of businesses which say they have recently had to renegotiate payment terms with their creditors has fallen from 166,000 in November 2013 to 56,000.
Andrew added: “A growing economy means fewer businesses are likely to show signs of serious distress. The last time we saw high numbers of businesses struggling to repay debts or talking to their creditors was in the wake of the UK’s flirtation with a double-dip recession in 2012-13.
“While it’s positive that signs of acute distress continue to fall, it’s no reason to be complacent. The latest GDP growth figures were lower than expected, and the finances of a healthy business can deteriorate rapidly depending on external factors, such as the cost of inputs or the failure of key customers or suppliers. As other statistics in the research show, some firms are starting to find their room for manoeuvre increasingly limited.”
R3 also tracks further indicators of everyday financial problems or signs of growth at UK businesses. Other recent signs of distress measured by R3 include:
– Regularly using maximum overdraft, cited by 8% of businesses.
– Decreased sales volumes, cited by 7%.
– Decreased profits, also by 7%.
– Fallen market share, 6%.
– Having to make redundancies, 2%.
In all, 20% of UK businesses are showing at least one of these signs of distress, slightly above the record low of 17% in December 2015.
Signs of business growth measured by R3 include:
– Increased profits, cited by 33% of businesses.
– Increased sales volumes, also cited by 33% of firms.
– Investing in new equipment, 33%.
– Business expansion, 24%.
– Growing market share, 23%.
Overall, 64% of UK businesses are showing at least one of these signs of growth, slightly below the record high of 69% reached in December 2015 and June 2016.
Andrew concluded: “General levels of business distress remain low and levels of business growth are still high, although growth has faltered slightly since a run of record or near-record highs. Still, like the overall economy, the vast majority of firms have fared reasonably well over the last year. Any uncertainty over the consequences of Brexit hasn’t filtered through too much – yet.”