Opinion

Interest rate time bomb ticking for the channel

The level of insolvencies are finally edging up, if a near 30% rise in fatalities can be described in such modest terms, and the superficial bubble the channel has inhabited in the last eighteen months could soon be about to burst.

The well documented cuts in public sector spending will be the first hurdle that many resellers will struggle to overcome; in the recession that market became a safe haven, sheltering some suppliers from the cold winds blowing through the commercial market.

However, the drama will truly unfold when the Bank of England finally raises interest rates from the historic lows recorded last year and this - a point not lost on venture capitalist veteran John Moulton, who reckons SMEs will be most vulnerable to changes.

There remain too many over-leveraged business in the channel that are currently insulated from the potential impacts that would emerge from a hike, albeit gradual, in interest rates.

Right now the banks are continuing to allow business to trade despite having EBITDA to debt ratio that are off-the scale as they are making relatively more money off the debt and rebuilding their balance sheets.

The government has struggled to keep inflation at the desired levels and a rise in interest rates will be natural tool to re-balance the economy.

This could spell disaster for many businesses in the channel but rich pickings for those wanting to execute consolidation strategies.

This was first published in October 2010

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