Insolvency body warns of a rise in zombie businesses

News Article

A long-running survey which tracks business distress in the UK, has found that thousands of businesses are on the brink of financial ruin, with many business owners claiming that a future rise in interest rates could push them over the edge.

According to the insolvency and restructuring trade body R3, 79,000 UK businesses believe they would be unable to settle their debts if interest rates were to go up.

This represents a four-fold rise, compared with the research’s findings less than a year ago which found 20,000 businesses in a similar position in September 2016

The research also discovered that 96,000 companies were only keeping their heads above water by paying just interest on their debts.

Other business distress indicators which R3 has been regularly measuring include:

  • Regularly using maximum overdraft (8 per cent of UK businesses)
  • Decreased sales volumes (7 per cent of UK businesses)
  • Decreased profits (7 per cent of UK businesses)
  • Fallen market share (6 per cent of UK businesses)
  • Making employees redundant (2 [per cent of UK businesses)

Andrew Tate, a spokesperson for R3, commented: “This is the first increase in the number of businesses worried they would be unable to cope with an interest rate rise since 2014, and it coincides with a period of slower than expected growth and a small rise in corporate insolvency numbers.

“UK firms have faced a challenging 2016 and early 2017: the sharp fall in the pound has made things difficult for importers, while a rising National Living Wage and the roll-out of pensions auto-enrolment have added to businesses’ running costs.”

He added: “Only paying the interest on debts is not necessarily a sign that a business is in distress: it may be that a company is taking advantage of low rates to invest in its operations or assets. But only repaying the interest is also a common characteristic of a ‘zombie business’ – a business only able to keep going because of an ultra-low cost of borrowing and with little chance of survival.

“The research shows that there are tens of thousands of firms currently walking a very tight line. Rising inflation may also lead to a double-whammy for struggling businesses: it may increase the chance of the Bank of England raising interest rates, and it would undermine the consumer spending that has driven the economy over the last year.”

Luke Morgan, a Partner with Palmers who specialises in commercial debts and business recovery, said: “When a business is affected by economic uncertainty, it is better to address financial concerns early on, rather than allowing the problem to escalate.

“If cash flow is a significant issue, businesses need to ensure that late or missed payments from customers are being chased and managed properly.

“In some circumstances, a missed payment from a major customer can be the difference between survival and ceasing trading, so if business owners are concerned about late payment issues they should seek prompt legal advice.

“Palmers offers a Commercial Debt Recovery Scheme to help businesses manage the recovery of their debts and to keep legal costs proportionate. Often a strongly worded solicitor’s letter is all that is needed to recover the outstanding payment but where this fails mediation and other alternative dispute resolution (ADR) procedures can be effective in recovering outstanding business debts. As a last resort, formal recovery action can also be taken.”

For support with business disputes and alternative dispute resolution as well as legal advice on commercial debt recovery, please contact us.