More than a quarter of UK resellers are losing money and one in six is close to collapse, gloomy new research has suggested.

Rising costs, price reductions and weak market conditions have forced 255 out of 1,000 resellers recently analysed by market watcher Plimsoll into the red. Some 162 are in danger of folding unless action is taken.

The research house expressed concern at the large number of VARs using overdrafts as a permanent means of finance.

With banks reassessing their exposure to SMEs, smaller resellers could be left in a position where their overdraft would need to be paid back on demand, according to the findings. Yet a quarter (252) of those analysed would not be able to pay back their overdraft on the spot.

Plimsoll also predicted the bleak market conditions would fuel increased acquisition activity towards the end of the year. This would be driven either by distress sales or large outfits paying higher sums for niche players to enter new markets.

Ian French, managing director of channel consultancy Siceo, agreed that it is a dangerous time to rely on overdrafts and other forms of short-term borrowing. “If you do not have a known period in which it operates, you will run the risk that it could be withdrawn at any time,” he said.

French added that there was anecdotal evidence to suggest a lot of resellers are close to breaching banking covenants attached to loans. “This is significant as it puts the loan into review or default, and in extreme circumstances you will be made to repay it on demand.”

However, Nitin Joshi, founder of Channelmoney, claimed Plimsoll had missed the point. “Overdrafts are more flexible and cheaper than a lot of other asset-based lending options,” he said.

On a brighter note, 128 of the firms analysed had reported a return to profit after having previously reported losses, thanks to tighter cost control and cutting overheads.