Number of businesses with serious cash flow problems hits new high
Number of ‘zombie businesses’ down, but bigger concerns for UK businesses
134,000 UK businesses are struggling to pay their debts when they fall due, the highest figure in the last 12 months, according to the latest ‘zombie business’ tracker from R3, the insolvency trade body.
An extra 24,000 businesses are in this position now compared to 12 months ago. Failing to pay debts when they fall due is a technical definition of insolvency.
Although the number of ‘zombie businesses’ – those that can only pay the interest on their debts – has fallen over the last year from 146,000 to 108,000, the rise in businesses with acute cash flow problems indicates that the outlook for struggling businesses is deteriorating.
In total, over 200,000 businesses are either struggling to pay debts when due or are negotiating payment terms with creditors.
Liz Bingham, President of R3, says: “Businesses struggling to pay debts when they fall due are in a very perilous position. While they have yet to enter formal insolvency procedures, businesses with such serious cash flow problems may find that the day of reckoning is not too far off.”
“There are fewer ‘zombie businesses’, but this is not necessarily because businesses that have been in this position are showing signs of improvement. Far bigger cash flow problems are occupying the thoughts of these businesses’ managers.”
The number of businesses negotiating payment terms with their creditors is also at a record high, up to 137,000 from 130,000 last year.
The time may be fast approaching for lenders, including suppliers and banks, to decide which businesses to continue to support and which to let go.
Liz Bingham explains: “With the economy recovering, it’s crunch time for struggling businesses as lenders start to make their minds up about which businesses to continue to support and which businesses to call time on.”
“Not all struggling businesses are doomed to failure. The prolonged period of low interest rates and government support schemes has made it hard to distinguish between businesses that are struggling but viable and those businesses that do not have a future.”
R3 says that an orderly ‘wind-down’ of failing businesses is important. In 2009, R3 research found that over a quarter of corporate insolvencies were caused by another company’s insolvency – the insolvency ‘domino’ effect.
Liz Bingham says: “The ‘zombie business’ theory assumes that keeping capital and talent tied up in ultimately unviable businesses crowds out others. However, the long-delayed failure of struggling businesses may cause a short-term jump in unemployment, and could hurt other businesses too.”