In Focus Collections
Challenging the rise of the zombies
Research suggests that one in 10 UK companies could be a ‘zombie business’, so what can be done?
Mike Cherry National chairman, Federation of Small Businesses
Over one in 10 (11%) UK companies is just paying the interest on its debts, rather than repaying the debt itself. Only being able to pay the interest, not
the original debt itself, is one potential sign of a so-called ‘zombie business’ – a company which is only surviving thanks to low interest rates but which otherwise might not be viable.
Productivity Zombie businesses are often linked to lower levels of productivity within an economy, as they do not have the available capital to invest in new operations, products, or services, while the investment tied up in them is denied to other, nimbler companies. Our research, based on a survey of 1,200
companies by research firm BVA BDRC, also found that other signs of acute business struggles are relatively widespread. One in six (16%) businesses are having to
negotiate payment terms with creditors; one in 10 (12%) are struggling to pay their debts when they fall due; and 8% would be unable to repay their debts if interest rates were to increase by a small amount.
Trading conditions Tougher trading conditions and much uncertainty over the future of the economy have contributed to a significant chunk of UK businesses finding themselves stuck in ‘zombie business’ mode.
32 These businesses are capable of ticking
along, but growth and increased productivity improvements are out of their reach for the time being. On the one hand, this means thousands of businesses are stuck in a position where they will struggle to deal with external shocks. This presents a problem if they all were to become insolvent at the same time. On the other hand, you have a significant
proportion of businesses which are tying up investment and staff which could be used by more productive companies elsewhere in the economy. Our members have reported economic
uncertainty is contributing to businesses treading water, with some building up stock to safeguard against future risks – such as the UK leaving the EU without a deal in March this year. Investing in the stockpile puts pressure
on cashflow and investment in other areas, while large stockpiles will take time to turn back into cash and are at risk of obsolescence.
Stumbling Rising interest rates will have also contributed to businesses stumbling into the ‘zombie business’ status. The future for these ‘zombie businesses’
is mixed. Some might eventually be able to restructure or find new investment, and grow. Others will run out of road and become insolvent.
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On the one hand, this means thousands of businesses are stuck in a position where they will struggle to deal with external shocks. This presents a problem if they all were to become insolvent at the same time. On the other hand, you have a significant proportion of businesses which are tying up investment and staff which could be used by more productive companies elsewhere in the economy
While this would mean capital could be
‘recycled’, it may also be a bit of an economic shock in itself.
Zombie-busting Positively, the UK’s insolvency and restructuring framework is highly rated by the OECD for its zombie-busting powers, and the government recently announced plans to improve the UK’s business rescue and restructuring options.
March 2019
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