Member Article

Interest rate rise would put nearly a quarter of Yorkshire & Humber businesses in financial difficulty

Almost one-in-four businesses in Yorkshire and the Humber and the North East say that they would be put into financial difficulty if interest rates were to rise by at least one percentage point in the next 18 months, according to a report by insolvency trade body R3.

The findings come from R3’s latest Business Distress Index, a long-running survey of a nationally representative sample of 500 business owners and directors.

Insolvency experts say that, despite the economic recovery over the last year, the figures show not all businesses are out of the woods yet.

William Ballmann, chair of insolvency trade body R3 in Yorkshire and partner at national law firm Gateley LLP, says: “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 keep lots of businesses going.

“The good news is that some businesses that might have expected to struggle after 2008 have been given extra time to put their finances in order.

“However, there is still a big chunk of businesses that will struggle once ‘normal’ recovery conditions, like rising interest rates, return.”

“A one percentage point rise in interest rates is at the upper limit of what we might expect in the eighteen months, but policymakers should bear in mind that many businesses still feel they’re close to the edge of their comfort zone.”

7% of business in Yorkshire and the Humber and the North East, compared with 6% across the UK, say they would be put into ‘serious’ financial difficulty were interest rates to rise over the next eighteen months, while 17% regionally (16% nationally) said they would be put into ‘some’ difficulty.

While the vast majority of businesses in the UK appear relaxed about the prospects of an interest rate rise, with 70% saying they would be unaffected, Yorkshire and the Humber and the North East showed more concern with only 56% saying they would be unaffected. Across the UK, 7% of businesses believe they would benefit from an interest rate rise.

Mr Ballmann says: “Businesses may be expecting their bank to absorb any interest rate rises – banks have not been applying nearly as much pressure on their business customers when it comes to basic business lending as they were after the early ’90s recession.

“Also, given how consistent speculation about rate rises has been in the last few months, many businesses will be planning ahead anyway.”

“An interest rate rise will have the biggest impact on ‘zombie businesses’ – those that are already only paying the interest on their debts – and personal finances.”

Research by R3 in November 2013 found that 6% of UK businesses (103,000 businesses) were only paying the interest on their debts, although this was down from 9% (160,000) in November 2012.

R3’s latest research was carried out by market research company BDRC Continental via their Business Opinion Omnibus. Telephone interviews with a nationally representative sample of senior financial decision makers at 500 UK businesses, weighted by size, region, and sector took place between 2 and 12 June 2014.

This was posted in Bdaily's Members' News section by Clare Burnett .