The term “zombie company” has received a lot of press in recent months. It refers to companies that, although perhaps still trading, are no longer financially viable but are being “kept alive”, often by banks (sometimes with government assistance) that may prefer to grant concessions to their borrowers than take enforcement action and write off the debt. The company is just about struggling along and paying interest on its debts but can not invest or grow.
There is debate about how many zombie companies there are in the UK but R3 (the Association of British Recovery Professionals) puts the figure at 160,000 (representing 9% of all UK businesses) and these include some of our favourite high street brands.
Are these companies a danger to the economy? They’re paying interest (generally) and continue to provide a service and employ staff, contributing to the economy. Surely the banks are entitled to consider the relationship they’ve had with these companies and grant them a bit of leeway?
On the other hand, what if interest rates rise, will we face a mass collapse of these zombie companies and a jump in unemployment as they’re tipped over the edge and, if so, can our economy cope with this? Even a rise in the minimum wage could kill off many of these companies.
Also, with the pressure for new lending, are the banks tying up too much capital in these companies that could be put to better use lending to more healthy businesses?
So should we allow these companies to fail and, if we did, would more viable companies take their place or are the banks doing what they can to help UK businesses and be understanding to their customers in times of financial crises, giving them a chance to attract investment and/or recover?
We’d be interested in hearing your views…