One in 25 businesses, or nearly 80,000 enterprises, would struggle to handle an increase in interest rates of as little as a quarter of a percentage point, according to research by the insolvency trade body, in the clearest sign yet of the fragile state of corporate balance sheets.
It is thought that some 79,000 businesses would be unable to repay their debts if rates were to rise, four times as many as in September when the Association of Business Recovery Professionals, or R3 as it is known, conducted a similar survey.
The research also revealed that 96,000 companies are only paying interest on their borrowings and failing to clear their debts.
The findings are likely to revive concerns from economists that ultra-low rates of 0.25 per cent are keeping unviable, over-indebted “zombie” firms on life support and tying up capital that could otherwise be directed at more productive businesses that would drive stronger economic growth.
Andy Haldane, the Bank of England’s chief economist, has conceded that, by keeping zombie companies going, low rates may be one of the causes of the nation’s chronically weak productivity.
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The increase in companies at risk of financial distress has come as the economy has slowed and as currency hedges protecting firms against higher import costs have dropped away. Input costs for businesses have been rising at more than 15 per cent largely because of the cheap pound.
Andrew Tate, a spokesman for R3, said: “This is the first increase in the number of businesses worried they would be unable to cope with an interest rate rise since 2014, and it coincides with a period of slower-than-expected growth and a small rise in corporate insolvency numbers.
“The sharp fall in the pound has made things difficult for importers, while a rising national living wage and the rollout of pension auto-enrolment have added to businesses’ running costs.”
Mr Tate said that “only repaying the interest is also a common characteristic of a zombie business” and that rising inflation, which has soared from 0.3 per cent in April last year to 2.7 per cent, could deal companies a double blow.
High inflation is driving up costs and should the Bank respond by raising rates the “double whammy” could create more problems. “The research shows that there are tens of thousands of firms currently walking a very tight line,” Mr Tate said.
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For the moment, with rates at a record low, the number of companies in financial distress is falling, R3 said. Only 25,000 companies are struggling to pay debts compared with the high of 134,000 in May 2013. Fewer companies have had to renegotiate payment terms with their creditors, the survey also found.
Strong growth is the best defence against corporate distress but the growth slowed to just 0.2 per cent in the first three months of the year, down from 0.7 per cent in the final quarter of 2016.
The R3 research was conducted by BDRC Continental among “senior financial decision makers” at 500 companies between April 3 and April 13.