Businesses struggle to clear debt

Eight per cent of businesses are failing to clear their debts after only just managing to pay off interest charges, the insolvency trade body R3 has said.

This equates to 146,000 so called 'zombie businesses' in the UK that, it warns, are nearing the point of insolvency but are 'hanging on, neither failing nor thriving'.

As well as failing to reduce the debt itself, research indicated that businesses would be unable to meet repayments if interest rates were to rise. Firms were also struggling to pay debts on the dates due and were increasingly having to negotiate payment terms with suppliers.

R3 president Lee Manning said many businesses had been 'running on empty' for some time and, with funds dwindling, were likely to close in the future.

"The danger for businesses that are teetering on the edge is that any change of circumstances, such as a rise in interest rates, the loss of a major customer, or suppliers upping their prices, will mean that they will not be able to hang on any longer," he said.

Businesses in the retail sector fared the worst, with the highest proportion of businesses (18 per cent) unable to pay their debts in the event of rising interest rates. Elsewhere, the construction sector had the largest proportion of firms who were only able to afford to pay the interest on their debts.

According to latest figures from R3, the number of insolvencies in England and Wales continued to rise in the second quarter of this year.

Around 1,310 firms became insolvent in the months April to June, up 1.5 per cent from the previous quarter and up 6 per cent on the year.

Some 21,000 jobs have been lost from the failures of major high street names since the start of 2011.

Manning also added: "We are yet to see the volume of construction failures that we would expect."

"With many capital expenditure projects coming to an end, cuts in public sector budgets and work from the Olympics having recently dried up, we can expect to see some of these businesses fail. Construction may well be the next big casualty from this recession."