R3 research suggests North East 'zombie business' numbers are rising

Economic recovery comes with cash flow woes for one in eight regional firms, according to R3's latest research

Crest Photography Alan Kelly chair of R3 in the North East and a restructuring partner in the Sunderland office of Baker Tilly
Alan Kelly chair of R3 in the North East and a restructuring partner in the Sunderland office of Baker Tilly

The number of companies across Northern England that are just paying the interest on their debts – a key characteristic of “zombie businesses” – has jumped from 10,000 in May 2013 to 45,000.

That’s one of the findings of insolvency trade body R3’s ’Zombie Business’ tracker, which reports regularly on the difficulties of hundreds of companies across the UK.

But rather than a return of the ‘zombie business’ phenomenon, R3 North East chair Allan Kelly believes the late payment and over-trading problems traditionally associated with economic recovery support the rise.

To back this belief up, R3’s latest research also shows that only just over a quarter (26%) of firms across the region are now showing any of the four key indicators of business distress that it measures.

The ‘Zombie business’ phenomenon emerged after the 2009 recession, when thousands of businesses that might have been expected to fail were kept afloat by a combination of low interest rates, lenient creditors, and a sluggish recovery.

The trade body’s tracker also measures the number of businesses that are having to negotiate payment terms with creditors, those which believe the firm would be unable to repay its debts if a small rise in interest rates occurred, and those which are struggling to pay debts when they fall due.

Allan Kelly, a restructuring partner at Baker Tilly North East, said: “The first flush of growth generated plenty of cash for businesses but now some are experiencing the side-effects of growth too.

“Over-trading and late payment can easily put businesses with bulging order books in a position where cash flow becomes a major headache.

“Businesses will get into trouble if they’re trying to run before they can walk by taking on too much new work without the necessary working capital or don’t get paid quickly enough for the work . Access to new finance is still tight so businesses low on cash have limited options to give themselves some breathing room.

“Making the minimum payments on debts or renegotiating payment terms with creditors can free up some extra cash and buy some time, but it’s not a long-term solution. Healthy cash flow is critical.”

The R3/BDRC research shows that 29,000 businesses in the North East, North West, and Yorkshire and Humberside are currently negotiating payment terms with their creditors, up from 18,000 in May last year 2013.

Allan Kelly added: “An improving economy will have pulled businesses back from the very edge, but a number of North East businesses are still in a potentially difficult situation.

“Just paying the interest on debts or constantly renegotiating with creditors could leave businesses in limbo – they will be in business but with little chance of growth, like the archetypal ‘zombie’ company.

“Once interest rates rise and sustained economic growth encourages creditors to get tougher, even these two options will be tricky - whereas the original ‘zombie businesses’ have had the benefit of years of low interest rates and lenient creditors, those conditions are probably coming to an end.”

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