THE UK’s continuing economic difficulties are causing more than one in six firms in the North to trade as “zombie businesses”.
That’s the key finding of insolvency trade body R3’s latest Business Distress Index (BDI), which reports on the successes and difficulties of hundreds of companies across the UK.
R3 has identified four “zombie indicators”, any of which could indicate that businesses are nearing the point of insolvency, but are still able to hang on, and so neither failing nor thriving.
These “zombie” signs are just being able to pay debt interest, but not reducing the debt itself; struggling to pay debts when they fall due; having to negotiate payment terms with suppliers; and believing that, in the event of a rise in interest rates, the business will be unable to pay its debt at all.
According to the new research, 18% of firms in the North of England – taking in the North East, Yorkshire and Humberside – are experiencing at least one of these concerns.
And 10% believe they would not be able to cope with any increase in interest rates, while 7% reported that they were already struggling to pay their debts as they became due.
It was also found that 6% of firms said they were negotiating with creditors around payment terms, and 3% are currently only able to pay the interest on their debts but not reduce the debt itself. This equates to 8,000 businesses.
Across the UK, 8% of companies say that they are only able to pay the interest on their debts, but not reduce the debt itself, which equates to 146,000 zombie businesses.
Steve Ross, chair of R3 in the North East and a director in the Corporate Recovery department of the Sunderland office of accountancy firm RSM Tenon, said: “A zombie business is one that is on the edge of insolvency but has been holding on, often for a prolonged period of time.
“An insolvent business is one that is unable to pay its debts when they fall due, or a business that has debts greater than the value of its assets.
“The danger for businesses that are teetering on the edge is that any change of circumstances – such as a rise in interest rates, the loss of a major customer, or suppliers upping their prices – will mean that they may not be able to hang on any longer.”