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Interest rates rise 'threatens a fifth of firms'

The findings from R3’s quarterly Business Distress Index highlight that 21 per cent of local companies would be in financial difficulty if rates were to rise by at least one percentage point before the end of 2015

Nigel Roddis/PA Wire
Mark Carney, Governor of the Bank of England

More than one in five Midlands firms would struggle to stay afloat if interest rates rise over the next 18 months, a new report reveals.

The findings from R3’s quarterly Business Distress Index highlight that 21 per cent of local companies would be in financial difficulty if rates were to rise by at least one percentage point before the end of 2015.

The survey echoes R3 Midlands’ earlier warnings that indications of an economic upturn should be viewed with caution and that a significant number of businesses remain financially vulnerable.

R3 Midlands Chairman Richard Philpott, a partner at KPMG in the region, 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.”

R3 believes that many of those surveyed who say they would not be affected by a rise in interest rates may be expecting their bank to absorb the increase.

Richard Philpott 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 the consistent speculation about rate rises in the last few months, many businesses will already be planning ahead for such an eventuality.”

Britain’s 10 million mortgage payers have already been warned to expect dearer borrowing costs after a Bank of England policymaker said stronger-than-expected growth meant the era of ultra-cheap money was drawing to a close.

Ian McCafferty, one of the four external members of Threadneedle Street’s monetary policy committee, said last week: “There is momentum in the pace of growth, and it looks like it will continue over the rest of the summer.”

 

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