Saturday 21 April 2018

Warning interest rate rise will bring big risk for firms

The European Central Bank. Photo: Reuters
The European Central Bank. Photo: Reuters
Ellie Donnelly

Ellie Donnelly

The expected rise in interest rates by the European Central Bank in the coming months presents a "major risk" to the viability of many businesses, the professional accountancy body has warned.

Irish businesses restructured during the financial crisis are at particular risk, according to the ACCA.

There are two related issues for businesses, the body said.

The first being that Irish business is over reliant on bank funding as a portion of total capital need.

"At risk" funding should be financed by shareholders as equity, rather than by bank funding, the body said.

ACCA also said company business models are being prepared using current and historical low rates, which don't work when rates are increased.

The best option for businesses that have an adverse debt-to-equity ratio is to use the current period of prosperity to refinance the business's share capital, and reduce reliance on bank debt, it said.

"Businesses need to identify the 'at risk' portion of their business and make sure that it is financed by permanent capital," said ACCA technical director Aidan Clifford.

"Company plans need to be recalculated using interest rates at least 2pc points higher than currently being charged with contingent capital identified to plug any gaps in finances that might be caused by a 4pc rate."

Indo Business

Business Newsletter

Read the leading stories from the world of Business.

Also in Business