As the London 2012 Olympic Games take place this week, 2% of businesses in the South West say that they are only able to pay the interest on their debts, but not reduce the debt itself. This equates to 3,000 ‘zombie businesses’ – according to research by R3, the insolvency trade body.
R3 measured four ‘zombie indicators’, any of which could indicate that businesses are nearing the point of insolvency, but are still able to hang on, neither failing nor thriving.
These ‘zombie’ signs are:
• Just being able to pay the interest on debts, but not reduce the debt itself;
• In the event of a rise in interest rates, the business will be unable to pay its debt at all;
• Struggling to pay debts when they fall due;
• Having to negotiate payment terms with suppliers.
Nick Keitley, Chairman of R3’s Southern Committee and Partner at Bond Pearce in Southampton, comments: “3,000 businesses in the South West are only able to pay the interest on their debts but not reduce the debt itself – this is a worrying number. The implication here is that these businesses have been ‘running on empty’ for quite some time now and with no reserves left in the tank, they may not be able to carry on for much longer.
“Essentially, 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 will not be able to hang on any longer.”
The research by R3, however, shows that the South West is faring better than most other regions in terms of the number of zombie businesses. It has the second lowest percentage in the country, a stark contrast to its neighbouring region the South East, where 14% of businesses report that they are only able to pay the interest on their debts but not reduce the debt itself (equating to 37,000).
