Talk of interest rate hike sparks insolvency fears among small businesses
Following calls from the Organisation for Economic Co-operation and Development (OECD) to raise interest rates to 3.5%, insolvency trade body R3 has traced the impact that rises would have on small businesses. According to a survey of 300 small businesses conducted this month:
- 7% of small businesses believe they are likely to become insolvent if the base rate rises to between 2 - 3.5%
- 12% of small businesses believe they are likely to become insolvent if the base rate rises to between 3.5 - 4%
- 18% of small businesses believe they are likely to become insolvent if the base rate rises to between 4 - 5% (it was over 5% in 2007).
R3 President Steven Law commented on the findings:
“For businesses that are repaying bank loans and rely on consumer spend, an increase in interest rates would be a double blow. Pressure will be keenly felt among 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 research shows that the hotel, catering and retail sectors are most likely to face insolvency in view of a rise in interest rates – about a third fear insolvency in any rise scenario. Small businesses in the construction and manufacturing industries are less likely to believe that they will become insolvent if interest rates increase.
By UK region, small businesses in the North West are the most likely to go into insolvency with increased interest rates, while the Midlands is the least likely.
Steven Law concluded: “Traditionally known as the manufacturing hub it is unsurprising that the Midlands region is less worried about a rates rise as their income comes from business-to-business spend rather than consumer spend. They often purchase plant on fixed term finance and will be in a better position than the highly geared businesses.
“Although increases in interest rates are likely to be gradual, we always advise any business owner who believes their company may be in financial difficulty to seek advice sooner rather than later.”
Methodology note: 300 small businesses (turnover £50,000 to £1million) were interviewed by BDRC Continental Research by telephone on the 3 - 7 May 2010. Quotas are set by size, region and sector and the data weighted to the profile of GB businesses of this size. The respondent in each case is a senior financial decision maker - often the owner in a small business. The question posed was: ‘Thinking about the impact of a change in interest rates on consumer demand and your business’s bottom line, how likely or unlikely do you think it is that your business would go into insolvency if the following happened over the next few months? The base rate rises to between 2 and 3.5%; the base rate rises to between 3.5 and 4%; the base rate rises to between 4 and 5%’. BDRC’s clients include Lloyds TSB, Royal Mail and The Department for Business, Innovation and Skills.
R3 Press Office