Would an increase in interest rates lead to a rise in business insolvency?

As we are all aware, the financial turmoil which the UK economy has seen in recent years has resulted in interest rates falling to historic lows. The recent rise in inflation and the potential increase in interest rates could be a ‘double whammy’ for some businesses. As inflation rises, the pound falls and the economy slows. At the present time, the UK is not experiencing strong growth in all sectors as growth slowed by 0.2% in the first quarter of 2017.

Could an increase in interest rates really have a detrimental impact on such a vast number of businesses?

Recent research has shown that nearly 80,000 businesses would struggle to deal with an increase of 0.25% 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. Also, research conducted for the insolvency body R3 has reported that there has been a fourfold increase in the number of companies which are currently at risk of closure and/or insolvency.

There are certainly a significant number of Zombie businesses (a business which is still trading only as a result of lenient creditors and low interest rates even though it is too weak to invest or expand) who are struggling to make repayments. Also, a significant number of companies have been found to paying only the interest on their borrowing and failing to clear their debts.

How to deal with potential increases in interest rates

Business owners should now be making plans for interest rate rises. It may be that businesses need to invest in order to remain competitive whilst others may need to borrow. Now may be a good time to take out a fixed rate loan while rates remain low. However, it is really important that if businesses need to borrow funds, this is done on terms affordable to the business and which can be sustained in the long term.

interest rates rise in insolvency

Business owners should regularly review cash flow. By ensuring that sales invoices are raised and paid on time, this will assist with cash flow.

Review the prices of your suppliers. Are they competitive with other suppliers? If not, change suppliers and save money. Also, if you need to purchase goods or services from a particular supplier, consider asking them to agree to fixed prices for a period of time.

Also, now is also a good time to review overheads to see whether there are any cost savings – review spending on utilities etc.

If you have any concerns about your business and its future viability, please do not hesitate to contact me.