East Anglia: One in five firms vulnerable to rise in interest rates, warns R3
06:00 25 June 2014
A significant rise in interest rates within the next 18 months could leave more than a fifth of East Anglia’s businesses struggling with their finances, a new report has warned.
The findings of the latest quarterly Business Distress Index from insolvency trade body R3 indicate that 22% of local companies would be in financial difficulty if interest rates were to rise by a full percentage point or more before the end of 2015.
The survey echoes previous warnings from R3 that many businesses remain financially vulnerable despite indications of an economic upturn.
R3’s eastern region chairman, Frank Brumby, a director at Isadore Goldman, said: “Economic recovery is just as tough a time for some businesses to negotiate as a recession, if not tougher. Normally, insolvencies peak after a recession, but we haven’t seen that this time around. Record low interest rates and high levels of creditor forbearance have helped many businesses to continue to trade.
“Whilst this has given rise to a sizeable number of ‘zombie companies’, only able to pay interest on their debts and thus highly vulnerable to interest rate rises, other businesses that might have expected to struggle after 2008 have been given extra time to put their finances in order.”
Although there is growing speculation that the Bank of England will start to increase interest rates before the end of this year, members of its Monetary Policy Committee have signalled that any rise to a more normal level is likely to be gradual.
R3 believes that many of the firms surveyed who say they would not be affected by a rise in interest rates may be expecting their bank to absorb the increase.
Mr Brumby added: “Banks have not applied nearly as much pressure on their business customers regarding basic business lending as they did after the recession in the early ‘90s.
“Also, given how consistent speculation about rate rises has been in the last few months, many businesses will already be planning ahead for such an eventuality.”
: : Small and medium sized firms in East Anglia were burdened with an average of £1.2million of trade debt during the last financial year, according to analysis by online commercial debt recovery law firm Debt Guard Solicitors.
It says this suggests that, despite the economic upturn, the strain on businesses remains severe, although the regional figure is better than the national average of £1.5m.