Five thousand (2% of) businesses in the South East say they would be unable to repay their debts if interest rates were to rise by a small amount – a significant rise from no 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 with small base sizes producing indicative results only, also found that 2,000 firms (1%) in the region were just paying interest on their debts.
Mike Pavitt, chairman of the Southern Committee of insolvency trade body R3 and corporate restructuring and insolvency partner at Paris Smith solicitors, Southampton, 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.
“South East 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.”
Pavitt added: “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 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. 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 South East businesses already showing signs of serious financial distress continues to fall.
Just 7,000 South East businesses (2%) say they are struggling to repay their debts when they fall due, which is down from a high of 52,000 (19%) in February 2013. Similarly, the number of businesses which say they have recently had to renegotiate payment terms with their creditors has fallen from 29,000 (11%) in November 2013 to 7,000 (3%).
Pavitt explained: “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, while a healthy business’s finances can deteriorate rapidly depending on external factors, such as the cost of inputs or the failure of key customers or suppliers. And as the other statistics in the research show, some firms are starting to find their room for manoeuvre increasingly limited.”