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Interest rate rise will haunt Britain’s army of zombie companies

4 min read

02 November 2017

It’s the stuff of economic nightmares, but this week’s interest rate rise brought it a step closer to reality. When banks increase the interest and charge for loans and overdrafts, thousands of zombie companies could be pushed into insolvency.

It’s a problem that has been nearly a decade in the making. Since the 2008 global financial crisis, there has been a large number of companies that are heavily indebted, but which have managed to stay alive thanks only to a historically low interest rate and increased creditor forbearance.

Many of these companies have been unable to restructure, invest and become more profitable because of the cost of servicing existing debt. In past recessions, businesses that were not productive or efficient enough would have been forced to cease trading.

Following the most recent recession many of those businesses have been able to limp on. As a result, the level of insolvencies – and the level of UK productivity – have both been unusually low.

As the Bank of England begins the process of normalising the interest rate, many zombie company owners may find the borrowed time they have been living on may be up. The interest rate rise means increasing costs. Many small firms are already financially overstretched, with the level of companies currently facing significant financial distress is estimated to be in excess of 400,000.

It’s no wonder business lobby groups were appealing to the Bank of England not to raise the interest rate.

Whether the business you operate is a zombie company or not, if it has cash flow problems and is struggling with finance, it is important to assess the impact of a rise in interest rates on your bottom line.

By undertaking the following steps you will be in a better position to understand the implications for your business.

(1) Forecast your profitability

If finance charges were to increase, how much would this affect your bottom line? Use the process to consider if there are any changes that you could make. Could you increase your prices? Are there alternative suppliers that may be cheaper? Have you any products or services that are unprofitable? Would outsourcing certain functions provide cost savings?

(2) Forecast your cash flow

Estimate all the cash inflow and outflow of your business on a weekly or monthly basis. If you are unsure on how to do this, seek help. Use the process to consider if there are any changes that you can make.

Could you agree better credit terms with your suppliers? Could you improve debt collections? The cash flow forecast will help you identify any difficult periods particularly if your business is seasonal.

(3) Review your finance

Is your current finance right for your business? If you think your business’s finance mix is not providing the funds needed to enable your business to grow it may be beneficial to obtain independent advice from a finance broker. There are many options available that may better suit your business’s needs.

(4) Seek advice as early as possible

If your business is suffering from financial distress or simply stressed, the earlier you obtain advice, the wider the range of solutions available to get your business back on track.

John Buchanan is performance senior manager at the chartered accountants HW Fisher & Company