The recession of 2008 gave rise to a unique and unprecedented set of economic circumstances intended to ameliorate the financial turmoil and allow a path to recovery.
Now, 10 years on, we are forced to contend with a number of unintended consequences. One such consequence includes the rise of anomalous economic beings like the “zombie firm” which have become increasingly prevalent over the last decade.
These undead companies operate in a space between growth and insolvency; employing thousands of people, but just barely ticking over as a result of low interest rates and forbearing creditors.
Though seemingly innocuous; zombie firms present a significant threat to the growth and development of the UK economy, particularly as the uncertainty of a post-Brexit economy looms.
What exactly is a zombie firm?
There are a number of different definitions used to describe or qualify what is and isn’t a zombie firm.
One definition refers to businesses unable to cover debt servicing costs from current profits over an extended period. Another describes any company receiving subsidised credit as being a “zombie” firm.
A recent report produced by KMPG defines a zombie company in a more nuanced and comprehensive way. According to KMPG, a zombie firm is a company with static or falling turnover, consistently low profitability, limited cash and working capital reserves, high leverage levels and tight margins.
Essentially, a business that is unable to invest in new equipment, products or processes and is therefore unable to innovate, grow and contribute to broader economic growth. Whether a company exhibits a few or all of these symptoms, there’s evidence to suggest that there is trouble ahead.
What are the consequences?
Even during previous recessions, if a business was not productively contributing to the economy it would stop trading, thus making room for new innovative and dynamic companies to take its place. This ensured available capital would be invested in only the most innovative, high-growth businesses.
Over the past decade, instead of seeing unproductive companies cease to trade, they have been enabled to continue on. They generate just enough profit to keep trading, but lack the ability to meaningfully contribute to the growth of the economy.
The continued existence of these firms has translated into a slowdown in the productivity of the UK. Unfortunately, with interest rates poised to rise, many of these businesses which have become over-leveraged will be unable to repay their loans.
If the economy continues to struggle, these companies which are already very vulnerable will be unable to continue, thus worsening an already fragile economic situation.
There are instances where companies exhibiting the symptoms of being a “zombie firm” can take actions to avoid becoming a drain on the economy. If you’re interested in learning more, contact Irwin Insolvency on 0800 009 3173.