Are thousands of firms in danger as ‘Zombie culture’ spreads into 2017?
Recent research from the insolvency and restructuring trade body R3 has found the amount of businesses just paying interest on debt instead of the actual capital has doubled in the last 12 months, now standing at over 139,000, which is 8% of all UK businesses.
This is often described as ‘Zombie culture’, whereby no repayment progress is made or forecasted due to stagnation of low interest rates. But, just for how long can these businesses survive by doing this?
In a statement regarding the news, R3 president Andrew Tate has said: “Apart from the initial shock of the EU referendum result, the environment has so far been relatively benign over the course of 2016.”
He warned: “Businesses should tread carefully and plan ahead to make sure short-term needs don’t jeopardise long-term survival; other indicators of acute distress are all down, such as having to negotiate payment terms with creditors and being unable to repay debts if there was a small increase in interest rates.”
Further in-depth research carried out by BDRC Continental has shown only 33,000 of these firms are genuinely struggling to pay debts on time, with this figure last year surprisingly higher at 55,000, revealing the increased number of borrowers in recent months are delaying paying off debts for reasons unrelated to availability of funds.
This evidence could reveal a ticking time bomb of issues, as Andrew Tate comments: “While there is little immediate cost for otherwise healthy businesses borrowing more, the danger is that problems are being stored up for later.”
This will occur if interest rates begin to rise again, or if perhaps further borrowing is necessary to navigate an unexpected downturn in business demand, particularly if some companies are already borrowing at the edge of their limit.
“I think it is a sign that we are starting to find things a bit more difficult,” Tate goes on to say. “It is strange because on the one hand we’re getting very positive economic data, but what our members, as people who deal with companies in distress, are finding is that a lot of businesses are starting to see fuel prices and energy prices increase. The effect of the exchange rate change is starting to put up their supply costs.”
Tate has warned of the anticipated harsher economic climate, due to uncertainty around the exchange rate and inflation which could end the spell of low inflation and low interest rates. As we begin 2017, all will surely be revealed.
Do you think zombie culture poses a real threat in 2017? Let us know your thoughts in the comments section below.