Insolvency fears sparked by potential interest rate rise

Date: 7th June 2010

A number of small businesses in the UK fear that a rise in interest rates would damage their future, according to a new report.

Figures from a recently-published survey by insolvency trade body R3 have revealed that seven per cent of the UK's smaller firms feel they would be likely to become insolvent if the rate rises to between two and 3.5 per cent.

Currently the Bank of England is holding the rate at an all-time low of 0.5 per cent.

However, the Organisation for Economic Co-operation and Development has suggested that the Bank should increase this to 3.5 per cent.

R3 president Steven Law said: "For businesses that are repaying bank loans and rely on consumer spend, an increase in interest rates would be a double blow.

"Pressure will be keenly felt among highly geared businesses and an increase in the cost of finance either for working capital or to fund expansion are factors than can lead to insolvency."

The report also showed that 12 per cent of small firms fear they would be unable to continue should the rate be increased to between 3.5 and four per cent, while 18 per cent voiced concerns about insolvency if the rate was set at between four and five per cent.