A rise in interest rates to 3.5 per cent would result in a significant increase in small businesses hitting the wall, according to insolvency experts.
The Organisation for Economic Co-operation and Development recently called for the Bank of England to put base rate up - but this could be disastrous for small firms already struggling to survive, according to insolvency trade body R3.
R3 has published a survey highlighting that seven per cent of SMEs believe they are likely to become insolvent if the Bank of England base rate rises to between 2 and 3.5 per cent.
And 12 per cent of small businesses believe insolvency would be imminent if the base rate rises to between 3.5 and 4 per cent.
R3 Midlands Chair Matthew Hammond, a partner at PricewaterhouseCoopers in the Midlands, said: “To put things into perspective, the survey showed that 18 per cent of small businesses felt they would be facing insolvency should the interest rate rise to between 4 and 5 per cent.
“In 2007, the rate was above 5 per cent.
“For businesses that are repaying bank loans and relying on consumer spend, an increase in interest rates would be a double blow.
“Pressure would be keenly felt amongst highly-geared businesses, and an increase in the cost of finance, either for working capital or to fund expansion, are factors than can lead to corporate insolvency.”
The R3 research highlights that the hotel, catering and retail sectors are most likely to face insolvency with a rise in interest rates, with small businesses in the construction and manufacturing industries the least likely.
There is some positive news for the Midlands as small businesses in the region are less likely to enter insolvency procedures than any other region in the UK.
Mr Hammond explained: “As the manufacturing hub of the UK, the Midlands has a strong reliance on income from business-to-business spend.
“This means that many undertakings purchase plant on fixed term finance and can be in a more stable financial position than highly geared businesses serving the general public.”
“Although future increases in interest rates are likely to be gradual, we always advise any business owner who believes their organisation is in financial difficulty to seek advice sooner rather than later.”