How will struggling businesses cope with an interest rate rise?

According to the latest research into struggling businesses 79,000 UK businesses (4%) say they would be unable to repay their debts if there was even a small interest rate rise.

The research, carried out in June 2017 by the insolvency and restructuring trade body R3 said this was almost a fourfold increase on the 20,000 from September 2016.

With the latest insolvency statistics for July to September (Q3) due to be published on October 27 the numbers of businesses in difficulty will become clearer but there are signs that Brexit has contributed to an increase in the number of businesses struggling where interest rates will compound their problems.

Indeed, the signs are ominous as the Bank of England, many economists and investment managers have been predicting a 0.25% rise is likely in November 2017. And the Labour party has begun preparations for a run on the pound when they are elected.

Exactly struggling business closing downhow many struggling and zombie companies, able to service only their debt repayments, there are in the economy is not clear but what is clear is that many would be pushed over the cliff edge by even a small rise in interest rates.

 

 

How can a struggling business prepare itself for an interest rate rise?

Unfortunately, there will be many that have left it too late.

There are three considerations that must be confronted which are how to fund the business, how to repay debt and crucially how to service debt when rates rise.

A company finding itself in this situation may not necessarily be a failure or inept.  It could be that it has a legacy of debt despite being profitable. This may be down to historical investment introduce development or growth during favourable economic times. Many companies today are much smaller than they were where they have downsized to become more profitable and reduce the funds needed for working capital. For many the downsizing hasn’t been a one-off exercise but continual as a form of genteel decline.

But that does not make a business immune to market forces and preparations to face a change in circumstances takes time and honesty. Indeed, a lack of investment means that a lot of companies are not prepared for the future.

While there are several options for dealing with unaffordable debts by rescheduling payments or writing them off, sustainability and viability need more than financial restructuring. This means freeing up funds to invest in improving profits, product development and growth which becomes more difficult when more cash is diverted to servicing debts.

Dealing with this conundrum is not something any struggling business should undertake alone. It is wise to use the services of a turnaround adviser to review the business in depth, help develop a plan for restructuring finances and reorganise operations to achieve sustainability and growth. And to help the company implement the plan and deal with the ensuing negotiations.

Leave a Comment

  • (will not be published)

XHTML: You can use these tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>