Insolvencies on the rise – what will happen when interest rates go up?


I read with great interest this week that Government statistics show that applications for Individual Voluntary Arrangements (IVAs) - where an individual comes to an agreement with their creditors to pay back their debts over a period of time - have reached their highest level since they were introduced in 1987.  In England there were 15,523 IVAs recorded in England & Wales in the third quarter, rising from 13,290 in the same period a year ago.

This spike comes amid a 10.6% increase in insolvencies since the end of June and there was a 2.1% increase in debt relief orders from June to 6,274.  On a more positive note outright bankruptcies fell slightly.

We are also seeing signs that more businesses are experiencing financial difficulties.  Taking in to account the impact of the crackdown on personal service companies, underlying corporate insolvencies rose by 15% on the previous three months.

Businesses are facing uncertain futures with issues such as Brexit to contend with and the Bank of England Governor, Mark Carney, stating that he expects interest rates to increase.  We are seeing that some businesses are telling us that there is a lack of confidence in certain areas which they believe are impacting on their sales. 

One adviser commented in the press that he believes “the rise in company voluntary liquidations suggests that some owners of small businesses are calling it a day and cashing in their chips amid uncertainty over longer term direction of economic growth and the UK pathway pre and post Brexit.”

My concern is that many businesses are managing with low interest rates but some could find it difficult if interest rates increase to service the additional cost of their debt.

So in the face of increasing debt costs, an uncertain future with Brexit and wavering consumer confidence, what can business owners do?

Develop your Business Strategy

Firstly, business owners need to ensure that they have a medium and long term business strategy in place.  Review what the challenges of Brexit might be for their business and develop strategies to address these risks. 

Review your Interest Rates

With regard to increasing interest rates and the impact on the cost of servicing debt, business owners should firstly review their banking and finance arrangements as I have noticed a vast difference in what rates businesses are paying.  It might be possible to negotiate better terms with a new bank or with your existing bank.  Looking at the structure of the business to ensure that arrangements are organised in a way that gives the bank greater security or confidence often helps.

Look at Alternative Funding

Whilst obtaining traditional forms of funding through mainly the high street banks has become harder over the past few years due to many factors - not least the internal issues many of these lenders have had themselves - there has been a rise in Alternative forms of funding with an ever increasing number of providers. Surprisingly however, it is estimated that as many as 42% of SME’s are still unware of the options currently available.

With the rise of Challenger Banks, Peer to Peer finance and other lenders in the market, there is an increasing amount of available funding at decreasing costs and sometimes with lower security requirements. Whilst more traditional overdraft facilities are being reduced and tightened it has never been a better time to look elsewhere at other options which could lead to not only a competitive cost but possibly a facility far better structured for the on-going requirements of the business.

At Armstrong Watson, we have a team of advisers to help businesses establish a strategy, put the right structures in place and seek alternative sources of finance.  

If you would like any further information about the above, please get in touch.

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