Recovery at risk from zombie businesses

The number of small and medium-sized companies experiencing “significant” levels of financial distress rose by 10.5pc in the third quarter of 2012, according to Begbies Traynor.

The Aim-listed firm said the increasing proportion of small businesses showing symptoms such as a marked deterioration in working capital or a rise in county court judgments filed against them signals the growing threat of so-called zombie companies.

These are businesses that are burdened with debt and unable to grow, but which are still generating enough cash to survive thanks to the benign attitudes of creditors and the low interest rates on their debts, reports The Telegraph

Julie Palmer, a partner at Begbies Traynor, said: “These zombie companies are only just generating sufficient cash to pay the interest on their debts and keep creditors at bay. They are in no position to deal with unexpected costs, lost orders or bad debts or to fund increases in working capital and invest in growth.”

These businesses act as a drag on the recovery by taking sales from healthier rivals and using assets, including people, that could better be deployed by growing companies.

Ms Palmer said the research also demonstrated that small companies were “bearing the brunt” of tough trading conditions since signs of distress among large companies declined by 61pc over the same period.

“Larger businesses are exploiting their scale by enforcing lengthier payment terms on [small businesses]. This, together with the disproportionate impact of higher energy prices and the limited availability of funding support, is combining to form a perfect storm for [small companies].

“At a time when the hopes for a UK recovery are pinned on the private sector delivering growth and investment, it is clear that the Government needs to act quickly to ensure that credit conditions for SMEs are improved or risk choking off a recovery before it really gets started.”