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Advice for SMEs on how to Avoid the Zombie Apocalypse

As a small business owner you may have come across the term “zombie business” already and could be wondering just what that means.  Unfortunately, we haven’t seen the launch of companies catering to the zombies in our midst, nor have a group of zombies got together to start a business of their own (whether that’s catering to other zombies or the rest of us mere mortals).  Quite simply, zombie business is the term that’s been adopted by the finance industry to describe the companies that put their future at risk by paying only the interest on their debts, rather than paying the capital itself.  The practice of paying off only the interest on a debt is often a sign of a business that is only surviving because of the low interest rates – the “zombies” of the financial arena! 

Apparently the number of zombie businesses has increased sharply over the past year.  While only 69,000 businesses  last year could be described as zombie, representing 4% of all business, this year has seen the figure rise to 139,00, which is 8% of all businesses here in the UK.  These figures were published by the UK insolvency and restructuring trade body, R3 which promotes best practice for professionals working with financially challenged businesses and individuals. 

R3 is the brand name for the Association of Business Recovery Professionals and has representation in all parts of the UK, providing a forum for debate on the key issues facing the profession.  It is a private limited company by guarantee and operates as a non-profit organisation.  The president of R3, Andrew Tate, is warning that business owners in the UK need to take great care and plan ahead in order to ensure that their short term needs don’t have a negative impact on their long term survival.  According to Mr. Tate, while there is little risk for healthy businesses when it comes to borrowing right now, there is a danger that they are lumbering themselves with problems in the future.  If interest rates rise again, or should they need to borrow further sums of money, they could find this challenging, especially the businesses that are already borrowing at their limit.

This “zombie culture” seems to be a result of low interest rates and low inflation and things are likely to get worse with both inflation and the exchange rate over the coming months.  The fluctuating exchange rate since the Brexit vote has led to an increase in supply costs for many business owners, as have the recent increases in fuel and energy prices.  Last year, a fall in the price of oil brought benefits for so many companies that rely on haulage and manufacturing but this has been cancelled out by the events of 2016.  It’s not just the UK that’s seen an increase in these zombie businesses, it’s happening in the rest of Europe too and governments have started to insist that the banks deal with this problem.