Business News: Rising interest rates threaten wholesalers

The bank of England’s recent decision to raise interest rates by a quarter point could have serious implications for wine and spirit wholesalers in the UK, according to industry commentators Plimsoll Publishing.

In a recent survey, the firm found that of the top 450 wine and spirit wholesalers, 200 are in more debt now than in the past four years.

Research by Plimsoll claims that  68 firms have debts that are already having an impact on their business and their ability to compete in the market place.

Plimsoll says early warning signs that a business could be too heavily geared are often present up to two years before the debt problem becomes serious. Companies tend to swap short-term debt for long-term debt. This has little effect on the company’s overall financial strength, particularly if debts keep rising.

As the debt increases, the company’s profitability starts to erode. In extreme cases, interest payments can absorb all profits. David Pattison, head of research at Plimsoll, says, “If these debts are allowed to go unchecked, any disturbance to the business could end in disaster. The loss of a key client, a large bad debt and increases in interest rates could be the straw that breaks the camel’s  back”.

Pattison comments, “We are always surprised at how no one at these companies seems to realise that their debts are rising and the effect this is having on the overall financial strength of the company. Unfortunately, it is not something that they tend to measure until it’s too late”.

© db September 2006