Interest rate rises would hit a quarter of North East businesses

Trade body R3 has conducted research into the impact of a 1% rise in interest rates

Crest Photography Alan Kelly chair of R3 in the North East and a restructuring partner in the Sunderland office of Baker Tilly
Alan Kelly chair of R3 in the North East and a restructuring partner in the Sunderland office of Baker Tilly

Almost a quarter of regional businesses (24%) say that they would be put into financial difficulty if interest rates were to rise by one percentage point in the next 18 months, according to a new report by insolvency trade body R3.

The latest Business Distress Index found that 7% of businesses in the North East, Yorkshire and Humberside felt their operations would be put into serious financial difficulty by a 1% rise in the interest rate before the end of 2015.

A further 17% said they would face some financial problems if this occurred.

One in five regional firms (20%) did, however, say they would benefit from an interest rate rise of 1%, a figure that is significantly ahead of the 7% national average.

The remainder of the regional firms surveyed (56%) said they wouldn’t be affected one way or the other by an interest rate rise.

The Business Distress Index reports regularly on the successes and difficulties of hundreds of companies across the UK,

Allan Kelly, chairman of R3 in the North East and a restructuring partner in the Sunderland office of Baker Tilly, said: “A one percentage point rise in interest rates is expected to be at the upper limit of increases in the next eighteen months, but policymakers should bear in mind that many businesses still feel they’re close to the edge of their comfort zone.

“Economic recovery is just as tough a time for some businesses to negotiate as a recession, if not tougher - insolvencies usually peak after a recession, but we haven’t seen that this time around, as record low interest rates and high levels of creditor forbearance have helped support lots of businesses.”

Research by R3 in November last year found that 6% of UK businesses could be classed as ‘zombie businesses’ although this was down from 9% in November, 2012.

Kelly continued: “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, but there is still a big chunk of businesses that will struggle once ‘normal’ conditions, such as higher interest rates, return.

“Businesses should not expect their bank to absorb any interest rate rises, as they have not been applying nearly as much pressure on their commercial customers when it comes to basic business lending as they were after the early ‘90s recession.

“An interest rate rise will have the biggest impact on ‘zombie businesses’ – those that are already only paying the interest on their debts – but given how consistent speculation about rate rises has been in the last few months, firms should already be planning ahead.”

Trade body R3 represents 97% of the UK’s insolvency practitioners.

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