Are Zombie companies really a drag on economic growth?

11th September 2014

It is almost a cliché that an increase in insolvencies is expected when an economy is on the upturn after a recession. So far this has not happened since the recession of 2008.

It is also a widely held view in some quarters that Zombie companies hold back economic growth.
A Zombie company is generally defined as one that can do no more than pay off the interest on its loans. At the start of 2014 R3, the Insolvency Industry trade body, estimated there were 103,000 such companies in the UK.

The argument is that while there are so many Zombies about lenders have their precious capital tied up and so are unable to lend to other businesses. The suggestion is that Zombies survive due to the forbearance of lenders. Banks are unwilling to be seen to be appointing Administrators and up until recently HMRC’s Time to Pay scheme helped the walking dead survive. And with no capital repayments needing to be made, the Zombies can keep their prices low thereby hampering the growth prospects of start ups and other fully functional businesses.

But is it really likely that a relatively small proportion of the total of UK Businesses could have such a significant impact on growth? So far there is little indication of how large or small these Zombie companies are. It would, however, be reasonable to assume that the bigger they are the more likely their troubles would have been to hit the headlines.
The House of Commons has been looking at this when considering assistance to small business. According to a Standard Note (SN/EP/6078) in June this year, in 2013 there were a total of 4.89 million small and medium sized businesses in the UK. Micro businesses with fewer than 9 employees added up to 4.6m, small businesses with less than 50 employees made up 186,000 and medium sized firms, consisting of under 250 employees, represented a further 30,000. Unlike our competitors in Europe, the SME sector employs almost 60% of the UK workforce.

Whilst the number of Zombies may look low, they do employ a lot of people and the government are relying upon SMEs to lead growth in the upturn. As interest rates rise in 2015, without significant intervention and support, some could go under. 

Many of these may still be viable businesses. However, as growth accelerates they will also be vulnerable to the risks of overtrading. With the right support from the restructuring community there is still time for some of these firms to be turned around. So we might yet see a rise in CVAs and alternative methods of funding to help the Zombies return to full health.