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Increasing number of fragile businesses could be ruined by small rise in interest rate

Authored by Phil Meekin

Phil Meekin

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Approximate read time: 2 minutes

There has been a fourfold increase in the number of companies which are currently at risk of closure and/or insolvency according to research conducted for insolvency body R3 by BDRC Continental, showing a bleak picture for the future of many businesses in Britain.

The research also showed that nearly 80,000 businesses would struggle to deal with a 0.25% increase on the current interest rate. It is also thought that 79,000 businesses would not be able to repay their debts if the interest rate was to rise.

Andrew Tate, spokesman 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 growth and a small rise in corporate insolvency numbers.”

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When R3 conducted a similar survey in September 2016, the numbers were four times lower and this latest research is the strongest sign yet that many balance sheets are in a delicate state. This news is unlikely to steady the nerves of economists who feel that the current low interest rate of 0.25% is unviable in the long run and is the reason for many zombie businesses still going.

Zombie businesses are those businesses on life support who are struggling to make repayments and tie up capital that could be used by more productive businesses. When 96,000 companies have been found to be paying only the interest on their borrowing and failing to clear their debt, this only adds to the worries about UK business and our economy.

The worry is not just that many businesses are likely to fall over if the interest rate goes up but also that the low interest rate could be causing the UK’s productivity to be as low as it currently is. As inflation rises, the pound falls and the economy slows, businesses are having to deal with an increasing number of financial pressures at the moment.

Commenting on the recent rise in inflation and the potential of a rise in interest rates by the Bank of England, Mr Tate said the ‘double whammy’ could create problems as; “research shows that there are tens of thousands of firms currently walking a very tight line.” The best defence to safeguard businesses across the UK is strong growth in all sectors which is currently not happening as growth slowed to 0.2% in the first quarter of 2017.

Although the number of companies in financial distress is lower than it was in May 2013, the number walking a thin tightrope with their finances is a significant problem for politicians, economists, businesses and experts alike.

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