Over 1-in-5 businesses say they would be put into financial difficulty if interest rates were to rise by 1% in the next 18 months, a report by insolvency trade body R3 has found.

R3’s most recent business distress index, which surveyed 500 business owners and directors, has shown that 16% of businesses would be in “some difficulty” and 6% in “serious difficulty” should interest rates rise.

Giles Frampton, president of R3, warns that for some businesses, economic recovery could be just as challenging as the economic crisis.

He said:

“Economic recovery is just as tough a time for some businesses to negotiate as a recession, if not tougher. Normally, insolvencies peak after a recession, but we haven’t seen that this time around. Record low interest rates and high levels of creditor forbearance have helped keep lots of businesses going.

“The good news is that some businesses that might have expected to struggle after 2008 have been given extra time to put their finances in order. However, there is still a big chunk of businesses that will struggle once ‘normal’ recovery conditions, like rising interest rates, return.”

The report comes shortly after Vince Cable, the secretary of state for business, warned that early rate rises would have an adverse affect on SMEs, as well as the wider economy.

Despite these concerns, 70% of businesses believe they would be unaffected by such a rise, with 7% thinking it would actually benefit their business.

Frampton added:

“Businesses may be expecting their bank to absorb any interest rate rises – banks have not been applying nearly as much pressure on their business customers when it comes to basic business lending as they were after the early ‘90s recession. Also, given how consistent speculation about rate rises has been in the last few months, many businesses will be planning ahead anyway.

R3 believes interest rate rises will have the biggest impact on so-called ‘zombie businesses’ – those that are only pay the interest on their debts and personal finances.

Photo by Martie Swart