Many commentators have been referring to the risk of so-called ‘zombie companies’, those being debt ladened but kept afloat by low interest rates and financial bailouts currently available from the Government.
You might ask ‘why the concern?’
Historically, when recovering from a recession, businesses might overtrade and, with rising inflation and interest rates, weaker companies struggled and became more likely to fail. This led to the financially stronger businesses being able to pick up the slack in supply and grow.
During the last financial crisis, this effect was dampened by low inflation and interest rates, meaning businesses which might have otherwise failed, survived by meeting debt repayments only, with little or no prospect of growing. This scenario is currently being flagged as a concern in the post pandemic markets, which may affect the much hoped for ‘V’ shaped recovery - the best-case scenario.
Until the financial bailouts end and businesses start to repay debt due, the effect is uncertain, but certainly one for fiscal strategists to ponder.
Whilst there are some who fear of the zombie, are they the menace the pundits would want us to believe?
We are in uncertain times and despite the difficulties for many, there will be stronger companies waiting in the wings take up the slack of those that struggle; they may well be looking to invest to increase capacity and provide employment to those who now find themselves unemployed.
Where this is not the case, is having a business surviving, maintaining employment and meeting its debt repayments an unpalatable alternative?
The Government coronavirus job retention bonus (JRB) was introduced as an incentive for businesses to retain employees and further introduced funding for new jobs for young people. It is clear that efforts are being made by policymakers to encourage investment in businesses and people, and there are steps that business owners can take to improve their position now or for the future. For the unemployment rate, maintaining an operating business would be a positive.
Hazlewoods business recovery and insolvency team has extensive experience advising a variety of businesses and will work with you find the best solution for you and your business in difficult times. For more information, contact Pete Frost at email@example.com or 01242 680000.