What is a Zombie Company and Can you Bring it Back to Life?
A zombie company constantly fighting off debt without ever flourishing. In fact, like a zombie, it shows many signs of operating like a normal business – it’s not until you look a little closer that all is not quite as it seems.
What is a Zombie Company?
A zombie company is a business that continues to operate as normally by trading and running its operations, but it has substantial debts that leave it unable to expand or grow.
By only ever paying the interest on its debts rather than any of the capital sum, the situation shows little sign of improving. The company is in a state of stagnation, as it cannot make a profit to start paying off its debts, but it is not in such trouble that it faces closure. It also does not have the money to hire new employees to kick-start growth but cannot afford to make any redundancies.
Radio 4 made a useful program about the subject, which you could listen to here.
Potential Causes of Zombie Companies
One of the leading causes of zombie companies in the past has been high-interest rates. This can make existing debts so expensive that companies can only afford to repay the interest on the debt. The current record low-interest rates make this much less of a factor.
If banks and other lenders fear a company could become insolvent, they will look to retrieve as much of the debt as possible. They will often try to avoid formal insolvency procedures like administration and liquidation, which often provide little creditor return. Instead, they will try to keep the firm trading in the hope it will make a recovery.
HMRC tends to be more tolerant of businesses it knows to be in debt but are doing what they can to repay the money they owe. In this case, HMRC can be open to negotiations to repay the debt, but the repayments can force a company into this state of limbo.
How many Zombie Companies are there in the UK?
Over the past couple of years, the number of zombie companies has fallen, but those that linger are still causing problems for the UK economy. Experts argue that zombie companies take up space in the marketplace and prevent new, more productive companies from entering markets and driving economic growth.
Many zombie companies have managed to survive thanks to the record low-interest rates that have been in place since 2009. Although any rate rise still looks a little way off, when it eventually comes, it could spell the end for many businesses in this state.
How to Avoid Your Business Becoming a Zombie
If you start to feel like your liabilities are becoming unmanageable, there are a few things you can do to avoid the zombie trap…
- – Reduce the debt – Firstly, you should look at ways to try and reduce the company’s debt. You could sell an asset to raise the capital to repay a proportion of the debt or look at ways to reduce the company’s costs. This could include renegotiating rental costs or reverting to the business’s core and most profitable activity.
- – Refinance the debt – There are likely cheaper debt options out there, allowing you to save considerably on the cost of your interest repayments. Many different lenders have entered the market in recent years to make up for the shortfall in mainstream lending.
- – Rescue the company – A turnaround practitioner registered with the TMA will be able to help you consider and arrange company rescue options such as a Time to Pay arrangement with HMRC. This can ease the financial pressure on your business by repaying VAT and PAYE debt in affordable monthly instalments.
- A company voluntary arrangement (CVA) is another potential route to bring your company back to the land of the living. This is a formal deal between you and your creditors to repay the money you owe over an agreed period of time, usually three to five years. You can continue to trade during this time.