Insolvency body issues warning over ‘zombie firms’

UK firms that are living on debt are taking unnecessary risks according to insolvency and restructuring body R3.

They have warned that a rising number of firms are risking their longevity by paying only the interest on their debts, rather than the outstanding capital.

R3 has revealed the number of firms in such a position now accounts for 8% of all businesses – around 139,000 companies, compared to 69,000 a year ago.

‘Zombie’ businesses are defined are defined as those that are only surviving while interest rates are low, and paying off only the interest is a common sign of this.

R3 president Andrew Tate has spoken of the need to plan ahead to ensure their short-term needs do not impact on the long-term futures of business.

Undertaking an independent business review can take an unbiased look at a company’s finances and identify potential areas of improvement.

According to R3, a number of key indicators of wider business health suggest that many firms could be in a precarious position should interest rates rise.

The research showcased that 33,000 firms were struggling to pay debts when they were due, although that figure has improve form 55,000 last year and from a peak of 134,000 midway through 2013.

R3 has cautioned against businesses borrowing more through fears that problems may occur further down the line, especially for firms that are borrowing close to their limit.

Rising energy costs, fuel prices and supply costs have all been credited for causing a rise in distress among the UK’s businesses.

Mr Tate said that low interest rates and low inflation have helped the zombie culture and warned that it is a concern not just in the UK, but also across Europe as well.

Banks across Europe are being asked by respective governments to tackle the issue in a range of ways in a bid to limit the number of insolvency and recovery cases.

By Phil Smith

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