Will the interest rate rise get the better of the zombies?

There is currently, in excess of, 400,000 businesses in the UK that are experiencing unprecedented levels of financial distress. Small firms in particular seem to be becoming increasingly overstretched when it comes to their finances. The reality is that the vast majority of these small businesses would probably not have survived this long in a ‘normal’ trading environment. The question now is whether or not rising costs coupled with higher interest rates will put an end to it.

To say that small businesses are merely surviving is quite true. In fact many are now defined as zombie companies.  In other words, they are leading a hand-to-mouth existence, satisfying only their immediate needs without the money for future plans and investments.  Zombie firms are likely to be drowning in debt and have often made the decision to reduce their costs to a minimum.  Any cash generated by a zombie business is used to meet the monthly wage bill and pay off the interest on debt.  Beyond this, the company does not have the capacity to invest or grow.

The reason for this long term bumbling existence is usually a combination of extremely cheap credit and the flexibility of cost-effective labour.  Small businesses that would ordinarily have gone under, have been able to keep their heads above water. But, as the minimum wage rises and the Bank of England turns off the tap to cheap money, this existence could soon dry up for many.  The chances are that already struggling companies will simply run out of cash and have to hang up their boots.

For small businesses in this situation, it can be an unnerving time. But there are steps you can take to make sure you understand the implications of these external factors for your business.  We’ve outlined a few pointers for you here:

Forecast your profitability

Ask yourself the question ‘how much will interest rate rises affect my bottom line?’  You need to consider this question now and for the future; factoring in further rate rises and assessing any changes you could make.  Could you source more cost-effective suppliers, is there room for any price increases on your products and could you outsource any of your business functions?

Assess your cashflow

Make sure you have a tight control on your cashflow and are monitoring cash in and cash out on a regular basis against your plan. This should be done monthly, if not weekly.  A formal cashflow forecast will help you to identify and plan for any difficult trading periods, especially if your business experiences seasonal fluctuations.

As part of your cash flow management, make sure you are on top of your customer invoices and that they are paying on time.  And look for opportunities to negotiate better credit terms with your suppliers.

Review your finance

The chances are that your business has taken external funding by now and you need to assess if this current finance is still right for you.  Are there ways in which you could finance your business smarter by seeking an alternative funding mix?  As well as providing the opportunity to potentially cut your repayment costs, you may also open up some additional funds to enable your business to grow.  Taking advice from an independent finance broker could pay dividends here as there are many options that could better suit the needs of your business.

Seek advice as early as possible

Economic influences are always going to affect small businesses, but if you are in control of your business plan and understand the criteria for running your business successfully, there are opportunities to make these factors work you.  You can make the necessary adjustments to combat interest rate rises in advance to protect yourself from the negative effects, and take advantage of the positive ones.

So, if your business is experiencing financial distress and you feel like you are constantly firefighting, you should seek advice as soon as you can to get your business back in the game.  Small adjustments in the short-term can have huge benefit in the long-term.  Interest rates are often a sign that you should either cut back or take the opportunity to grow.

Either way, sound financial planning is crucial.

For more information on the range of available funding options and advice on the most cost-effective route for your business, contact Pegasus Funding Resources on 0203 327 0567.

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