As banks increase the interest they charge for loans – and overdrafts – thousands of ‘zombie’ companies could be pushed into insolvency.
It’s a problem that has been nearly a decade in the making. Since the 2008 global financial crisis, there has been a large number of companies that are heavily indebted, but which have managed to stay alive thanks only to a combination of historically low interest rates and increased creditor forbearance.
Many of these companies have been unable to restructure, invest and become more profitable because of the cost of servicing their existing debt.
In past recessions businesses that were not productive or efficient enough would have been forced to cease trading. Following the most recent recession many of those businesses have been able to limp on. As a result, the level of insolvencies – and the level of UK productivity – have both been unusually low in recent years.
As the Bank of England begins the process of normalising interest rates, many of these zombie companies may find the borrowed time they have been living on may be up.
Rising interest rates mean rising costs and many small firms are already financially overstretched with the level of companies currently facing significant financial distress estimated to be in excess of 400,000.
It’s no wonder business lobby groups were appealing to the Bank of England not to raise interest rates.
Whether the business you operate is a zombie company or not, if your business has cash flow problems and is struggling with finance, it is important to assess the impact of a rise in interest rates on your bottom line.
By undertaking the following steps you will be in a better position to understand the implications for your business and know when to seek advice.
For more information, please contact:
John Buchanan, Performance Senior Manager
T 020 7874 7954