Similar problems could arise among many other companies and industries. Financial markets expect the bank base rate – which dictates the rates on many types of loans – will keep climbing: it’s currently forecast to peak between 5.75% and 6% by the start of 2024. And the total value of UK business loans is also expected to rise to an estimated £513 billion as of 2023. This is £78 billion higher than in 2018, an increase of 18%.

Company insolvencies have already jumped by 40% over the year to May 2023 in England and Wales – the highest level since monthly records began in January 2019. And significant debt problems within an industry or even one firm can cause a domino effect across the UK economy.

Research shows the effects of an insolvency or bankruptcy can spread to a firm’s trading partners. Wilko started to defer supplier payments and extend the timeframe in which it settles invoices last year to try to ease pressure on its cash flow as it struggled to manage its debts.

So, with interest rates likely to continue to rise, being able to tell if another company or industry is at risk is important for customers, employees, investors and other connected businesses such as suppliers.

The rising cost of business borrowing

The average cost of new borrowing from banks by private non-financial companies was 6.36% in June 2023, more than 4 percentage points above the December 2021 rate of 2.03% (when the Bank of England base rate increases began). For small and medium-sized enterprise (SMEs), new loan rates increased from 6.86% in May to a record high of 7.13% in June (compared with 2.51% in December 2021).

Companies already holding debt that’s not on a fixed rate of interest could also see an increase in the interest owed to their lender. This could come as a shock since UK interest rates were 1% or less for more than 13 years from February 2009 to June 2022. During this time, the pressure of debt on borrowers was light or negligible.

The base rate has recently climbed from low levels

Companies that got used to being able to borrow at a low cost are now starting to feel the pinch, or even come under extreme pressure if they are heavily indebted. This is what worsened the financial position of UK utility Thames Water. When the company was privatised in 1989, it had no debt. But over the years it borrowed heavily to fund new investments.

Generally speaking, debt is a prudent low-cost source of finance with low interest rates fixed for the long term. But Thames Water borrowed too much. It had £14 billion in debt by the end of June 2023, which amounted to 80% of the value of the business and made it the most heavily indebted of England and Wales’ water companies, according to analysts. Its loan repayments were not only linked to the bank base rate, but also inflation, which has also spiked over the past year. This triggered fears about the company’s ability to continue to service its debts.