Debt and Gearing | Rising Interest Rates Threaten Business Solvency

Businesses with high levels of gearing are facing the prospect of rising interest costs and difficulties in raising new bank loans.

This excellent article in The Observer highlights the threats facing businesses of all sizes, including supermarket giant Morrisons.

Top of the list of challenges is the rising cost of financing bank loans.

As the article points out:

"For British businesses which have loans at a variable rate, or need to refinance, rising interest rates will have a marked effect on costs and profits."

The example given of Morrisons is a good one.

Its takeover by venture capital funds was largely financed through debt. Consequently the amount of loans in its non-current liabilities from from £3.2bn in January 2021 to £6.8bn a year later.

Rising interest rates are adding tens of millions of additional annual interest costs for Morrisons.

And its not just the industry giants at threat.

Small businesses too, many of whom still have loans taken out under the coronavirus support schemes are facing rising interest costs and difficulties in raising additional finance.

The article quotes recent research suggesting that one in five small businesses in the UK which applied for bank finance in the third quarter of 2022 failed to find an offer at an interest rate below 11%.

During a period of very low interest rates, high levels of gearing were often not a problem for businesses.

But now things are looking mcuh scarier.