One in eight of east’s firms ‘would struggle with interest rate rise’

R3 Eastern Chairman Frank Brumby

R3 Eastern Chairman Frank Brumby - Credit: Archant

A rise in interest rates within the next 18 months would leave one in eight East of England businesses struggling with their finances, according to a report.

The Eastern branch of insolvency trade body R3’s regular Business Distress Index highlights that 13% of companies based in the region would be put into financial difficulty if interest rates were to increase by at least one percentage point before the spring of 2017.

This compares to the one in 10 businesses that would benefit financially from a rise, the highest of any region in the UK, while the vast majority (75%) say that they would be unaffected.

The survey also found that 8% of East of England businesses say they would struggle to repay their debts if interest rates were to rise, which is twice the national average of 4%, and represents around 24,000 businesses in the region.

R3 Eastern chairman Frank Brumby, a director at Isadore Goldman in Norwich, said: “Although the 13% statistic is close to half the 22% recorded in June of last year, the new figure still represents a sizeable number of local businesses which would be negatively affected by an upward swing in interest rates. It is crucial that such companies prepare ahead of time for the inevitability of a rise.

“There is also a word of caution for those businesses who feel that they would be able to brush off an increase. Although they may not be affected directly, it is very likely to impact on their customers. Businesses have to be ready for how consumers will react to higher borrowing costs.”

Commenting on the quarterly insolvency statistics (for July-September 2015) published by the Insolvency Service today, R3 Eastern Chairman Frank Brumby said: the trade body for Insolvency Professionals

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Corporate insolvencies

“The numbers of corporate insolvencies continue their long and slow decline since their peak in the recession. Although this week’s growth figures show businesses aren’t exactly flying, there are not too many that are really struggling.

“The unique conditions of this recovery – low interest rates and creditor forbearance – mean we never saw the traditional post-recession spike in corporate insolvencies. The circumstances of this recovery have also given businesses the space and time needed to restructure themselves outside of the formal insolvency process. The current low levels of inflation, lack of pressure for wage increases and the strong pound helping importers, may also be assisting businesses at the moment.

“According to R3’s most recent membership survey, the most common recent causes of business struggles have been the underperformance of particular products, the failure of long-term business strategy, or a mistake by the business. At the moment, it is more likely that businesses are causing their own problems rather than any particular economy-wide headwind.

“One such headwind could be an interest rate rise, although the timing of this keeps moving beyond the horizon. R3’s last Business Distress Index found one-in-eight East of England businesses saying an interest rate rise could cause them to struggle. The remainder may not be affected directly, but they should think about how a rise will affect consumers as this will have a knock-on effect for them.

“Easier access to non-traditional finance for businesses may be helping to keep the number of insolvencies down. While the banks are open to lending they remain cautious, but there are many other types of funding available. Peer-to-peer lenders and venture capitalists are keen to lend as they can see better rates of return than from traditional investments.”

Personal insolvencies

“Personal insolvencies have generally been falling since the recession: although insolvencies are up this quarter from last quarter, they are well below where they were this time last year. Economic recovery is finally making a big dent in insolvency numbers which ballooned pre-2009.

“IVA numbers have fallen so far and fast over the last year, some ‘bounce’ up is not unexpected.

“It’s a positive surprise to see that the number of bankruptcies hasn’t risen in the last quarter. From this month, you have to owe at least £5,000 to one creditor before you can be made bankrupt, up from £750 beforehand. There was a chance of a last minute rush of creditors trying to take advantage of the old rules. It’s a good thing this hasn’t happened and creditors may have adopted a ‘business as usual’ approach to their debtors.”

“Although wages are now outstripping inflation, this may have come too late to help some individuals. On the other hand, there may be those who have felt able to ‘splash the cash’ again but who have been caught out.

“An interest rate rise, whenever it does come, will be a test for many household finances.

“The next quarter’s statistics will be the first since the changes to personal insolvency legislation relating to bankruptcy and Debt Relief Orders (DROs) thresholds were introduced. The new rules make it easier for people to enter DROs so it will be interesting to see if the predicted increase in their numbers happens.”