The mismanagement of the economy and the high cost of borrowing are pushing UK small businesses to the brink of bankruptcy.
As economists predict the prospects of a looming recession for the bearish UK economy, rising interest rates put many UK businesses at risk of bankruptcy, The Telegraph reported Sunday.
The situation is dire. Aston Martin Lagonda, one of the UK’s most prestigious car companies, is starting to allow investors to buy shares from £103 in a bid to ease the cost of crippling debt. Morrisons, which was acquired by Clayton, Dubilier & Rice in October 2021, doubled its debt from £3.2bn in January 2021 to £6.8bn a year later.
Although Moody’s believes the company has sufficient funds to service its debt, a 1% increase in interest will cost Morrison £30m a year in additional fees, which is likely to impact company shares.
The Central Bank clearly knows that things will get more complicated for companies facing high indebtedness and difficult capital markets.
“Those who need to refinance will be most at risk given rising financing costs,” said Richard Etheridge, associate managing director at Moody’s.
A team of analysts from S&P Global Ratings said for 2022 alone, interest rates across the world have risen at a faster pace than at any time in the past four decades, adding that if central banks in the EU and UK were to raise interest rates and energy prices continued to rise, it would “quickly accelerate defaults.”
Analysts say ‘zombie’ companies, which are companies that survive debt by paying low interest rates, will potentially face retaliation because rating agencies mainly focus on large companies.
Unlike small businesses, large companies can issue bonds and stocks, but the high cost of bank loans remains a serious concern for small businesses.
Daryn Park, senior policy adviser at the Federation of Small Businesses, said: ‘If interest rates hit 6% it will start to drive the price of many businesses down.
According to a survey of FSB members, one of five small businesses that applied for loans in the third quarter did not find an offer at an interest rate below 11%.
The consequences are even more serious for small businesses that depend on bank loans to invest in growth. “If we’re heading into a tighter market, they won’t be able to grow,” Park said.
According to Norman Chambers, chief executive of the National Association of Commercial Finance Brokers, the next six months are expected to increase “distressed borrowing” from companies in need of emergency funds, adding that brokers, who act as mediators between companies and banks, should “extend loan terms and consolidate if possible.”
But the banking sector has not shown much concern about this.
UK Finance, the banking industry lobby group, said in September that there remained “high financial leeway among SMEs, and lenders continue to stand ready to support businesses”.
Katie Murray, head of finance at NatWest Group, said on Friday that “loan writedowns remain extremely low”, despite the bank acknowledging that it expects credit risk to increase among its customers.
Stephen Pegge, managing director of commercial affairs at UK Finance, acknowledged tough times were ahead for the UK economy, but said the share of debtors was the same as before the pandemic.
“Banks have been testing for some time whether companies can afford higher interest rates,” he said. “It gives me confidence that things could turn out well.”
In a report published last year by the Central Bank of England, it was pointed out that an increase in borrowing costs of around 4% would “significantly increase the share of companies with a heavy debt service burden. “.
But these comments were made when the base rate for banks stood at 0.1%.
Now that the rate has risen to 2.25% and further increases are expected, increases of four percentage points in borrowing costs are more possible than ever.
The study also suggested that the cost burden would be brought under control if wages fell, but did not consider other scenarios in which sales would fall as interest rates soared.
Louise O’Sullivan, director of Interpath Advisory, a debt and restructuring advisory firm, said the pace of interest rate hikes had “taken a lot of people by surprise”.
When interest rates were still low, companies slacked off on interest rate risk hedging.
But it is now clearly too late to take preventive measures.
Sandra Kylassam-Pillay, who is also a director of Interpath, said: “It’s not the isolated interest rate hike that’s affecting businesses right now,” adding that “it’s also inflation. and the cost of living – all of which means businesses are under increased stress.”