Economic recovery comes with cash flow woes for some
The number of businesses just paying the interest on their debts – a key characteristic of ‘zombie businesses’ – has jumped from 103,000 in November 2013 to 154,000 now, according to research by insolvency trade body R3.
This is the highest number of businesses in this position in eighteen months.
But rather than a return of the ‘zombie business’ phenomenon, insolvency practitioners suspect that late payment and over-trading problems associated with economic recovery are behind the rise.
‘Zombie businesses’ emerged after the 2009 recession when thousands of businesses that might have been expected to fail were kept afloat by a combination of low interest rates, lenient creditors, and a sluggish recovery.
Giles Frampton, president of R3, says: “The first flush of growth generated plenty of cash for businesses but now some are experiencing the side-effects of growth too. Over-trading and late payment can easily put businesses with bulging order books in a position where cash flow becomes a major headache.”
“Businesses will get into trouble if they’re trying to run before they can walk and don’t get paid quickly enough for the work they’re doing. Access to new finance is still tight so businesses low on cash have limited options to give themselves some breathing room.”
“Making the minimum payments on debts or renegotiating payment terms with creditors can free up some extra cash and buy some time, but it’s not a long-term solution. Healthy cash flow is critical”
The R3/BDRC research shows that 135,000 businesses are currently negotiating payment terms with their creditors, up from 74,000 in February 2013.
Giles Frampton adds: “An improving economy will have pulled businesses back from the very edge, but thousands of businesses are still in a potentially difficult situation.”
“Just paying the interest on debts or constantly renegotiating with creditors could leave businesses in limbo: they will be in business but with little chance of growth, like the archetypal ‘zombie’ company.”
Giles Frampton adds: “Once interest rates rise and sustained economic growth encourages creditors to get tougher, even these two options will be tricky.”
“Whereas the original ‘zombie businesses’ have had the benefit of years of low interest rates and lenient creditors, those conditions are probably coming to an end.”
100,000 businesses say they would not be able to repay their debts if there was a small rise in interest rates, while 64,000 say they struggle to pay their debts when they fall due.
In November 2013, 56,000 businesses said they struggled to repay debts when due, but this was well below the 134,000 businesses in this position in May 2013.
‘Zombie business’ numbers peaked at 160,000 in November 2012 before falling back to 102,000 in August 2013.
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Research undertaken by BDRC Continental, an award-winning insight agency. Questions were put to 500 UK businesses via BDRC Continental’s monthly Business Opinion Omnibus. Telephone-based interviews with a nationally representative sample of senior financial decision makers across the UK, weighted by size, region and sector. Fieldwork dates 4th to 14th August 2014