Survival of the fittest

An interesting article in the times today – statistics released by Deloitte reveal growing optimism amongst the UK’s entrepreneurs. Over 80% consider that their businesses will grow by more than 10% in the next 12 months, being the highest proportion since the survey began 5 years ago. Furthermore, a reported 56% of entrepreneurs said they were confident enough to start using reserves accumulated since the 2008 recession to fund growth. Bank of England figures show bank lending to SMEs fell by £700m in August, following an £893m decrease in July suggesting that many companies failed to meet bank lending criteria or chose alternative sources of finance.

So there are signs of increasing confidence and dare I say it, potentially the beginnings of an economic recovery. If as suggested in the article, many companies may experience significant growth in the next year, growth will have to be adequately resourced and I wonder whether we are likely to see a reduction in unemployment in the UK. Mark Carney, the Governor of the Bank of England has stated that if unemployment falls below 7%, he may consider increasing interest rates much sooner than 2015 or 2016 being the dates many economists believed interest rates would increase.

An increase in interest rates may not impact too heavily on those companies able to finance growth from their own reserves however an interest rate increase is likely to have a severe detrimental effect on companies that are reliant on bank finance particularly those companies that are currently only able to service the interest on loans.

In addition, an interest rate rise is likely to have a major impact on individuals with variable rate mortgages and without sufficient disposable income to meet increased mortgage repayments. It may be that the holy grail of a period of sustained growth may be a poisoned chalice for the more financially distressed companies and individuals in the UK.

There is no doubt that increasing rates of corporate and personal insolvencies may create opportunities for those that are better placed to survive, the Bank of England is all too aware of the less positive effects growth may have and accordingly, increases in interest rates are likely to be minimal and over a long period of time, hence there may be opportunities for financially distressed companies and individuals to restructure and ensure they are able to meet the challenges ahead. We would recommend that professional advice is taken as early as possible in order to maximise chances of survival.