Regulators are concerned that business are racking up unsustainable levels of debt leaving them vulnerable to external economic shocks and rising interest rates on loans.
Not so long ago it was difficult to get any kind of business loan from the banks as the financial crisis put squeeze on lending. Now the opposite seems to be the case and this should alert business owners who may be concerned about the chances of debt recovery if interest rates go up and force customers out of business.
At the moment the UK economy looks in good shape with the vast majority of SMEs reporting growth, however, if interest rates do go up in the near future it will inevitably increase the level of debts firms get into putting them at greater risk of insolvency and in turn this can make debt recovery even more difficult.
The Financial Stability Board has suggested a cap on the pace of lending similar to that introduced in mortgage lending where the number of loans at 4.5 times borrower’s income are limited. If business loans are limited in this way, this could create further problems for companies who may not be able to get the finance they need.
The recent economic downturn in emerging markets has once again raised the spectre of another economic slowdown some analysts are calling another phase of the crisis which began in 2008.