It has been revealed that more businesses in the UK rely on debt finance that any other European country. This data has been found after finance statements for over 4m European countries were assessed. Nearly a third of companies in the UK had an equity rating of under 10% in 2009. This is a vast difference when compared with Sweden, where a mere 14% of businesses have a lower than 10% equity rating.
There is thought to be a direct connection between weak capitalisation and a high risk of insolvency. It also indicates are no different from individuals when it comes to relying on debt finance. Martin Williams, from the credit agency; has said,
‘The level of indebtedness means we weren’t ready for the recession. When the money dried up, it made it very hard for them to get hold of any more debt.’
It does seem, however, that things are in the process of changing due to UK banks now trying to avoid taking risks and now request much more detailed information about businesses and also charge higher fees. This has caused businesses to steer away from debt and increase capital themselves.