According to the latest findings from insolvency body R3, 139,000 businesses in the UK can only pay the interest on their debt, not any of the debt itself. This accounts for roughly 8% of all UK businesses.
R3 suggests the all-time low interest rates reflect the increasing number of these types of businesses, however it may not mean they are ‘zombie companies’.
A zombie business is neither ‘dead’ nor ‘alive’ and is merely surviving on its debts. While it is unable to thrive and grow, it’s operating well enough to avoid closure.
President of R3, Andrew Tate, said, “Apart from the initial shock of the EU referendum result, the business environment has so far been relatively benign over the course of 2016. It’s more likely that otherwise healthy businesses are taking advantage of record low interest rates to keep cash in their business.”
The overall number of companies becoming insolvent is actually falling, according to R3/BDRC Continental research. There were 33,000 businesses in financial distress this year compared to 55,000 last year. Fewer are asking for more flexible payment terms, indicating businesses are coping better than they have been in previous years.
He continued, “While there is little immediate cost for otherwise healthy businesses borrowing more at the moment, the danger is that problems are being stored up for later on. Businesses may run into trouble when interest rates start to rise again or if fresh borrowing is needed to cope with a downturn in fortunes, especially if businesses are already borrowing at their limit.”
“It’s all very well just paying off the interest on debts at the moment, but businesses in this position also need to make sure they have enough cash to hand to make any balloon payments on their debts when they are due.”
You might be wondering “how do I get an interest only loan for my business just like an interest only mortgage?”
If your business is in overdraft then by definition you’re not paying back the capital that has been lent to you. If you have a machine that’s worth a lot of money and you keep refinancing the loan, then in a way you are only paying the interest.
It would be interesting to see more analysis on so called ‘zombie companies’. I think it is accepted worldwide that any big interest rate shock will cause problems but this is, in some ways, putting the cart before the horse. Higher interest rates usually come with economic growth and inflation which can actually cause debt to shrink in real terms.&nb