Monday 20 November 2017

Half a million businesses in distress as interest rate hike looms

The Begbies Traynor Red Flag report found 448,011 firms were feeling the strain in the third quarter, up 27% from 352,552 in the same period in 2016.

London stock
London stock

By Ravender Sembhy, Press Association City Editor

The number of British companies in significant financial distress has jumped to nearly half a million as fears rise that an expected interest rate rise will push thousands over the edge.

The Begbies Traynor Red Flag report found that 448,011 firms were feeling the strain in the third quarter, up 27% from 352,552 in the same period last year.

Begbies is warning that the prospect of an interest rate rise this week, alongside increasing employment costs, will see many of these companies go bust.

Britain’s poor economic performance since the Brexit vote, the collapse in the pound, soaring inflation, declining retail sales, depressed consumer confidence and the construction sector’s slide into recession were all flagged as having hammered businesses.

Julie Palmer, a partner at Begbies, said: “The number of firms experiencing ‘significant’ financial distress has reached unprecedented levels over the past 12 months, as businesses in search of growth have overstretched themselves, taking too many risks after being lulled into a false sense of security by the continued low interest rate environment.

“My biggest concern is on the UK’s ever-expanding consumer credit bubble, which could burst at any minute, knocking the consumer industries and financial sector for six.”

Consumers have been loading up on cheap debt as their spending power and living standards decline following sterling’s sharp depreciation following Britain’s decision to quit the EU.

“While the prospect of an interest rate increase will of course go some way to addressing this, the knock-on effect for many struggling businesses with high levels of debt could be severe,” Ms Palmer added.

The research also shows that no part of the UK or market was unscathed, with financial distress rising across every sector and region of Britain over the past year.

The professional and financial services sectors were worst affected, seeing a 42% increase in struggling businesses to 26,113 and 34% to 11,079 respectively.

Support services, construction and retail had the highest volume of businesses in distress over the period, with 101,614, 57,338 and 35,895 companies respectively showing signs of financial distress.

The worst-performing region of the UK was London, where 107,896 companies ended the period in a state of distress, an increase of 6% year on year.

Begbies added that almost 250,000 of the 448,011 are so-called “zombie” companies that have managed to survive thanks to the prolonged low interest rate environment and flexible labour market, but which do not have adequate working capital to fund any growth or absorb rising input prices.

Ric Traynor, executive chairman of Begbies, said: “The prospect of an interest rate hike this week seems all the more likely, which will be worrying news for many firms who have been relying on low rates to keep their heads above water.”

Press Association

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