Interest rate rise ‘risk’ to small businesses

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A rise in interest rates to 1.5 per cent is likely to throw 218,000 small businesses into serious financial trouble, a survey said.

The Begbies Traynor Red Flag Alert, which looks at the financial health of UK companies, said a one per cent rise in the base rate by the Bank of England would hit thousands of small firms because many of these businesses still carry heavy debts taken on during the recession.

It added that the number of companies that moved into “significant distress” rose by 60,000 in the third quarter of the year to 237,000, the third quarterly rise for firms in this category.

Expectations of a rate rise from its historic 0.5 per cent low have been brought forward to this year, or early in 2015, due to stronger UK economic data.

Significant distress at larger companies fell nine per cent to 19,507 over the same period, due to easier access to bank or other market funding.

Begbies Traynor chairman Ric Traynor said: “While low interest rates and creditor forbearance continue to ensure that businesses are kept off the critical list, you just need to scratch beneath the surface to see clear signs of a twin track economy.

“While larger corporates have taken full advantage of the market opportunities available to them, a growing number of SMEs are overtrading and risk falling at the last hurdle.”

However, the number of firms in “critical distress” has fallen by nine per cent over the last year to 2,745, the ninth consecutive quarter of year on year improvement.

Begbies Traynor partner Julie Palmer said: “Access to funding is still a major issue for a huge number of UK small and medium sized businesses. Although traditional bank finance is now widely available for those firms fortunate enough to comply with mainstream lending criteria, it remains a different story for businesses in complex or challenged circumstances.”