Zombie firms have been a part of the UK business landscape for many years, with many hanging on after the end of the last financial crisis, surviving the pandemic, and even managing the shock of the cost-of-living crisis. Like their namesake, they really are the living dead.
However, in light of the current, evolving financial landscape, there are some significant market trends and predictions that are likely to be relevant to your business, especially if you have outstanding debts.
Impact of rising interest rates
The UK currently has numerous companies termed as “zombie” businesses. These are firms that, in essence, survive primarily due to the previously low borrowing costs, barely managing to service their existing debts. Insolvency experts predict that these zombie businesses may not endure the recent surge in interest rates.
In fact, they foresee a potential collapse of virtually all such companies within the next 18 months as they struggle even more to manage debt repayments. These firms have often been a drain on supply chains and the economy, as they fail to invest or improve productivity due to their indebtedness.
The insolvency landscape
Reflecting these concerns, recent data shows that company insolvencies in England and Wales are at a 24-year peak. A substantial 2,552 companies filed for insolvency in May 2023, marking a 40 per cent increase from the previous year. This number of insolvencies even surpasses the previous rates seen during the pandemic – although at the time businesses could benefit from the Government’s support measures.
As a result, many firms in insolvency practice are growing and income has rocketed. Industry experts, including Russ Mould from stockbroker AJ Bell, point out that insolvency practitioners often experience growth during challenging economic times.
Many companies are reaching a point where their cash flows are insufficient to service their debts, pushing them towards insolvency.
Which businesses are struggling the most?
While it’s essential to understand the broader economic picture, also note that smaller companies tend to be the earliest casualties in financial downturns. Currently, the focus is shifting to mid-market companies as they too begin to experience difficulties due to higher interest rates and inflation.
Conversely, firms like the UK’s largest pawnbroker, H&T, have experienced substantial growth due to the economic conditions, with gross lending rising 22 per cent in the last six months. Such trends indicate increased demand for short-term financial solutions and services, indicating a wider struggle throughout the UK economy.
It is important that you understand these trends, and accordingly, ensure that you are prepared for potential challenges and can navigate the shifting economic waters with prudence and insight.
If you need any assistance with insolvency advice, please speak to our team.