According to new research the number of businesses only paying the interest on their debts has risen to 154,000, up from 103,000 in November 2013.
These so called ‘Zombie companies’ were recognised shortly after the recession in 2009 when thousands of companies were kept afloat by a combination of low interest rates, lenient creditors and lack of alternative options for creditors and company directors and owners alike.
The recent improvement in the economy is resulting in many of these businesses thinking that they ‘may be out of the woods’ and saved from the precipice.
Years of reduced turnover take their toll on Zombie companies
However, the years of reduced turnover and using up cash reserves have taken its toll on these zombie companies and they may now have little available funds to grow.
The businesses that are attempting to drag themselves out of zombie status run the risk that they find themselves experiencing the headaches of lack of working capital and over trading in a desire to satisfy orders with still slow payments from customers. A bulging order book will require a significant amount of cash flow to work through which in many businesses isn’t currently available.
Zombie companies should address business finance solutions
Access to new funding in the market is still restricted and so these businesses find themselves with an eagerness to accept new orders, but limited options available to fund completing the work.
A solution such as renegotiating payment terms of creditors can help in the short term, but thought will need to be given to the long term success of the business especially, if as anticipated interest rates rise.
Companies will need to take a long hard look at business finance solutions. Strategies such as invoice discounting or factoring can speed up release of cash and can also benefit from someone taking away the day to day hassle of debt. If there is simply not enough time and immediate funds are required then it may be a case that emergency business loans could help. Whilst this is only a short term injection of cash it can provide the company with some breathing space to manage the order book which in turn may give the company the kick start it requires.
Alternatively there are business recovery solutions
When cash is tight, we often see HMRC debts starting to mount whilst spending is redirected elsewhere. Unfortunately it is quite easy to let the debt accrue to a level the company can no longer afford to manage. If this is the case then the company could consider a time to pay arrangement with HMRC. This cash flow management solution gives the company time to get back on track, whilst paying HMRC over a period of up to twelve months. Alternatively if it is the trade creditors that are applying the pressure, then it could be that time is required to pay them off using a Cashplan. Alternatively a more formal CVA could be used to write off that element of the debts that the company can not afford to pay.
With the predicted rise in interest rates it is important that directors of viable businesses give immediate thought to finding the right cashflow solution to help them survive the next twelve months and build a longer term sustainable business.