The term 'zombie company' is one that has been largely coined by the media in recent years, but it does do a reasonably good job of describing the state some companies can find themselves in. A zombie company is one which is neither alive nor dead. In fact, like a zombie, it shows many of the signs of operating like a normal business – it's not until you look a little closer that you find all is not quite as it seems.
What is a zombie company?
A zombie company is a business that continues to operate as normal by trading and running its operations but it has substantial debts that leave it unable to expand or grow. By only ever paying the interest on its debts rather than any of the capital sum, the situation shows little sign of improving. The company exists in a state of stagnation, as it is unable to make a profit to start paying off its debts, but it is not in such trouble that it faces closure. It also does not have the money to hire new employees to kick-start growth, but cannot afford to make any redundancies.
Over the past couple of years the number of zombie companies has fallen, but those that linger are still causing problems for the UK economy. Experts argue that zombie companies take up space in the marketplace and prevent new, more productive companies from entering markets and driving growth in the economy.
Many zombie companies have managed to survive thanks to the record low interest rates that have been in place since 2009. Although any rate rise still looks a little way off, when it eventually comes, it could spell the end for many businesses existing in this state.
Potential causes of zombie companies
– Interest rates – One of the leading causes of zombie companies in the past has been high interest rates. This can make existing debts so expensive that companies can only afford to repay the interest on the debt. The current record low interest rates make this much less of a factor.
– The banks – If banks and other lenders fear a company could become insolvent, they will look to retrieve as much of the debt as possible. They will often try to avoid formal insolvency procedures like administration and liquidation, which often provide little creditor return. Instead, they will try to keep the firm trading in the hope it will make a recovery.
– HMRC – HMRC tends to be more tolerant of businesses it knows to be in debt but are doing what they can to repay the money they owe. In this case, HMRC can be open to negotiations to repay the debt, but the repayments can force a company into this state of limbo.
Keep your business alive and kicking
If you start to feel like your liabilities are becoming unmanageable, there are a few things you can do to avoid the zombie trap...
– Reduce the debt – Firstly, you should look at ways to try and reduce the company's debt. You could sell an asset to raise the capital to repay a proportion of the debt, or look at ways to reduce the company's costs. This could include attempting to renegotiate rental costs or reverting to the business's core and most profitable activity.
– Refinance the debt – There are likely to be cheaper debt options out there allowing you to make considerable savings on the cost of your interest repayments. A wide range of different lenders have entered the market in recent years to make up for the shortfall in mainstream lending.
– Rescue the company – A turnaround practitioner registered with the TMA will be able to help you consider and arrange company rescue options such as a Time to Pay arrangement with HMRC. This can ease the financial pressure on your business by repaying VAT and PAYE debt in affordable monthly instalments.
A company voluntary arrangement (CVA) is another potential route you can take to bring your company back to the land of the living. This is a formal deal between you and your creditors to repay the money you owe over an agreed period of time, usually three to five years. You can continue to trade during this time.
How can we help?
For more information about any of the options listed above, please get in touch with the team here at companydebt.com. We offer no-obligation, cost-free business debt advice to prevent your business joining the ranks of the undead.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
