Interest rates will drive higher insolvencies warning

UK business leaders have called for action after new predictions that thousands of businesses will fail due to their inability to repay loans which have soared due to rising interest rates.

The Centre for Economics and Business Research (Cebr) revealed there were over 6,700 business insolvencies in Britain in second quarter of this year, more than double what was seen in a typical quarter during the pandemic, though during that period businesses were largely protected from insolvency through a range of measures. However, even compared with a more normal period these are up by 50% compared with the same quarter in 2019. For comparison, the number of quarterly insolvencies averaged 4,100 between 2015 and 2019.

The previous peak (before Q2 2023) in quarterly insolvency levels was in 2009, during the financial crisis.

“Even if we take account of the fact that some of the more recent insolvencies are businesses that might have collapsed in 2020 and 2021 (if there had not been pandemic-induced government support) insolvencies are reaching worrying levels,” Cebr added.

The high level of business failures follows headlines that include the collapse of retailer Wilko and construction company Buckingham Group as well as warnings of the risk of bankruptcy at shared office provider WeWork.

“As Cebr warned back in 2020, many businesses took on debt during the pandemic in order to survive, particularly in sectors such as retail and hospitality,” the report explained. “These businesses saw a post-pandemic boom in demand, but many are likely to still be repaying loans.

“Such businesses paying back loans will be struggling amid the high interest rate environment. The Bank of England has raised its main policy rate from 0.1% in December 2021, to now stand at 5.25%. Higher borrowing charges add to the costs faced by businesses already paying loans, and also deter investment in new projects and equipment. Cebr is currently forecasting further rate rises from the Bank of England to a peak rate of 5.75%, meaning the worst is yet to come in terms of borrowing costs, quite apart from the impact of fixed term loans made when interest rates were lower being rolled over at the new higher rates.”

The think tank added while the UK economy has shown a lot of resilience to the impacts of the high rates of inflation seen in 2022 and 2023, growth in GDP remains very weak, with just 0.2% growth in Q2 2023.

This rise in insolvencies may be indicative of a wider downturn in the economy. If large investments in projects are being delayed, likely due to high borrowing costs, and businesses are collapsing, there will be impacts felt throughout the economy, from suppliers of materials to workers losing their jobs.

Looking to the future, Cebr said it expects the rate of business insolvencies to remain high as interest rates continue to rise, pushing up debt repayments to unsustainable levels for some businesses. Our models suggest that there could be 7,000 insolvencies per quarter on average across 2024. Furthermore, Cebr is forecasting a recession in the UK, with two consecutive quarters of contraction in GDP in Q4 2023 and Q1 2024.

Business leaders have called for the government to take action to deliver relief to businesses.

Steven Mooney, CEO at FundMyPitch said: “Why the government is continuing to squeeze the life out of hard-pressed businesses is a complete mystery. Our entrepreneurs and innovators took a serious beating during the Covid-19 pandemic, yet all of them complied with lockdown rules despite losing huge sums of money.

“Their reward for such suffering? Spiralising interest rates and no sign of a lifeline from the government. If things don’t change soon then we’re on a path to simultaneously destroying and a new generation of businesses and crashing the economy.”

Josh Boer, director at tech consultancy VeUP added, “These figures should serve as a wake-up call to the very real risks facing British businesses and underline the need to embrace technology to reduce overheads in challenging times. The reality is that far too many companies still operate with outdated systems in place, failing to take advantage from the full benefits of enhanced IT through cloud technologies that can transform businesses for the long term.”