The number of businesses in the UK that are trading but only making the interest payments on their loans has increased according to research conducted by insolvency trade body R3.
These so-called ‘zombie’ companies, a phrase coined at the time of the 2008 economic crash,
would have originally failed because a combination of bank, HMRC or creditor pressure would have forced the issue. However, since 2008 there has been a lot of forbearance from the banks, and they have been happy to let companies continue, even though they are only paying the interest on their loans and not any capital. Many loans have been rolled over as opposed to being written off by the lender as bad debt.
In recent years, it has been suggested that zombie companies are one of the reasons for low levels of productivity in the UK. These companies simply can’t afford to invest in new equipment, people or premises and therefore can’t innovate or contribute to growth in the UK and global economy. Furthermore, it has been said that funding these companies is preventing banks and other financial institutions from lending to more dynamic start-ups with the potential for higher productivity.
Cause for concern
Gavin Bates, Financial Director at PBC, said: “The concern moving forward is that if inflation, interest rate rises, or financial issues related to Brexit occur, it could push these companies over the edge and force them to make a decision about their future. An interest rate rise could sound the death knell in one of two ways. Firstly, it increases the cost of their debt, and, secondly, it impacts on consumer demand for their product or service. Interest rate rises affect consumers in terms of their mortgages and personal borrowing and a reduction in their expenditure could have a negative effect on the turnover of these companies that are already struggling.
“The increase in the number of zombie companies is a sign of increasing pressure within the economy, and businesses should be thinking now about putting in place measures which will enable them to deal with the consequences.” he concluded.