By Daniel Hunter
There are now 160,000 zombie businesses in the UK, that is businesses only able to pay the interest on their debt but not the debt itself, according to research by insolvency trade body R3.
This is nearly a 10% increase on the number of business owners who said in July they were only servicing their interest, when it stood at 146,000 (or then 8%, today 9% of all UK businesses). This follows a gloomy pronouncement last week from the Governor of the Bank of England, Sir Mervyn King, that Britain, “may be in for a period of persistently low growth.”
“The phrase ‘zombie business’ has been bandied around quite freely and looking at companies that can only service the interest they owe, but not the debt itself, is a practical definition of this term," R3 President Lee Manning commented.
"I would add that the phrase also extends to those companies who are currently over-geared and cannot pay back the debt in full. We know that banks are displaying greater forbearance on existing debt, but when a business cannot get extra lending it will be unable to expand. Others would argue that this stagnation ties up capital that could be used for other, healthier businesses.”
Corporate insolvency rates remain historically low, especially when contrasted with previous recessions. Corporate insolvencies for this recession peaked in 2009 at 25,432 for England and Wales. This meant there were nearly 8,000 fewer corporate insolvencies in 2009 compared to 1992, and they dipped again in the last quarter.
“Low insolvency rates are good for employment, and our relatively flexible insolvency regime has allowed many insolvent businesses, especially in the retail sector, to emerge from administration with some jobs or stores intact. However, corporate insolvencies have traditionally tended to spike in early recovery, but so far this recession is re-writing the rules," Manning continued.
“This surely reflects this longer period of low growth that is the new norm, with low interest rates and low liquidation rates, but many businesses running at a loss. I would urge any business that is merely servicing debt over a sustained period of time to consider seeking professional advice.”
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