Research carried out by BDRC Continental, an award-winning insight agency, has found that more and more ‘zombie businesses’ have turned their fortunes around and are now back from the dead.
What is a Zombie company? In essence, a zombie company is in so much debt that it’s all it can do to generate enough cash to pay off the interest on its debts, thereby never actually reducing the debt itself. As every penny is used to service the debt, there is no cash available to invest or grow the business by investing in more staff or better machinery. So, although the business is still operational, it is neither making money nor able to pay off its debts to improve its position. Technically they are still insolvent but creditors are more patient and willing to wait.
The research has shown that the number of businesses in this catatonic state has fallen from 154,000 in August 2014, to just 69,000 today. This figure represents the smallest number of businesses that have found themselves in this position since the survey began in June 2012.
The role of interest rates and creditor forbearance
The economic climate has been kind to zombie businesses in the last 18 months. Increased creditor forbearance has had an important part to pay in the falling number of zombie companies, with creditors such as banks still under pressure to show they are doing their best to support customers by providing greater flexibility in regard to their repayments.
The research supports this increase in creditor forbearance, with 97,000 businesses saying they have been able to negotiate payment terms with their creditors over the past year.
Interest rates have also been a big help to businesses that have found themselves in a position where they are struggling to pay their debts. In fact, 77,000 businesses have said they would be unable to keep servicing their debts if increase rates rose by one percent or more. There’s no doubt low interest rates have been a great help to struggling businesses since they fell in 2009, but they won’t last forever.
Businesses are now experiencing greater profitability
Encouragingly, the findings suggest that businesses which were previously struggling are now experiencing greater profitability, and are using the extra cash they have to pay off the debt capital, rather than just the interest. The biggest contributory factor is the current period of ‘non-flation’, which is helping zombie businesses turn their fortunes around. It is also thought that a strong pound and lower oil prices are playing their part.
However, while the number of businesses that are unable to repay their debts has fallen by a nearly a quarter when compared to last year, there are still a significant amount of companies that will be in a precarious position when the long awaited interest rate rise does come.
Are you operating a zombie company?
While some insolvency practitioners say the survival of zombie companies has helped to protect jobs, economists argue that the presence of zombie companies is taking up market share and locking up dynamic talent that could be made available to more agile and less indebted firms.
If you’re operating a zombie company and to continue to trade in the future it’s important you pay off your debts as quickly as you can. There may be alternative forms of finance or credit that yu could explore to unlock the value in company assets such as machinery, equipment or even your debtor book.
Alternatively, if no other sources of funding are available to pay off the debts, proposing a company voluntary arrangement (CVA) could be your best way forward. A CVA can be bring a business back to life when it is overwhelmed by historic debts but still has good prospects. You will have to come up with a realistic repayment plan over a period of up to five years that 75 percent of your creditors agree to. The result is that payments are reduced, or a proportion of them are written off, and legal action against the company is ceased. Alternatively some of these companies may be better of liquidating and starting again to provide a better return for creditors and securing the business future and jobs.
For more information about securing your company future call 08000 746 757 to speak with an experienced team of company rescue experts at Company Debt or email [email protected].