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Bank Lending

Over a quarter of businesses yet to budget for interest rate rises

By CreditMan Tuesday, June 17, 2014

With the Bank of England signalling a rise in bank base rates that could come as early as October, research by Company Watch, corporate financial health trackers, has found that more than a quarter (26.5%) of the nearly 500 firms it surveyed had not budgeted for a rise in the costs of their bank debt.

Company Watch commissioned market research group OnePoll to ask financial decision makers at companies across the UK about their preparations for higher interest rates.

Forty four percent of firms admitted that an interest rate rise of any size would put their business under financial pressure.

Of the firms that had modelled for higher interest rates, 26% had done so for before January 2015, and the vast majority (97%) were modelling for higher interest rates from before June of next year.

The biggest number of respondents - 40% - were preparing for interest rate rises of only 0.25%, with the next highest number (30%) budgeting for an increase of 0.75%, and with 25% modelling for a 0.5% rate rise. Current UK bank base rates are 0.5% and have been at this level since March 2009.

While well over a third (37%) had increased provision for bad debt for the rest of the year, 41% had decreased it, and 21% had not changed their existing bad debt provisions.

Over half (52%) based their bad debt provision on the previous year’s write offs, while 38% said they calculated it using a simple percentage of total trade debtors.

In terms of Days Sales Outstanding (DSO) figures, 40% said these had fallen, while for 18% of firms they had risen. For 28% DSO numbers were unchanged, although 15% admitted they were not sure of their current situation.

A surprising 45% of firms said they were not monitoring the financial strength of their key suppliers, and 39% said they did not look at the financial health of their whole supply chain (key suppliers and their respective key suppliers).

When asked about business optimism compared to this time last year, most said (35%) said it was the same, with only 28% more optimistic and 36% with less optimism.

Interestingly, companies in Scotland were much more optimistic, with well over a half (57%) more optimistic than this time last year, while companies in the north west were the most pessimistic with 42% saying their optimism was lower than last year.

Emma Caister, Director, Company Watch, said:

“UK businesses have become accustomed to low interest rates since 2008, so perhaps it’s not surprising that over a quarter of our sample hadn’t yet begun to examine the potential impact on their businesses of higher costs of bank debt even though a rise is widely anticipated.

“Clearly with many companies in the Company Watch survey still feeling the effects of the long recession, even a small increase in debt costs might end up having a big impact on the strength of their businesses.

“It’s sensible for companies to understand what higher interest rates might do to their own businesses but just as importantly they should also monitor the financial health of their main suppliers and their supply chains, especially since 44% of the firms we surveyed admitted any form of interest rate rise would put their business under pressure.”

Other key findings

Almost 70% of companies surveyed said they were trying or would try to lock in their current debt terms with their lenders.

Moreover, nearly a third (30%) said they would look at changing their lender in order to cover the cost of an interest rate rise.

Perhaps an indication of the effects of the long recession, over a half said they would look to cover the cost of an interest rate rise by trying to increase sales.

And a third said they would cover the extra charges through cost savings. Only 3% said they would put up prices to pass on the extra debt costs to their customers.