A zombie company is one that is near the point of insolvency but just able to survive – neither failing nor thriving. R3 claims this equates to 8% of UK businesses, which are only able to pay the interest on their debts but not tackle payments around the debt itself.
Lee Manning, R3 president, said, "The implication here is that these businesses have been ‘running on empty’ for quite some time now and with no reserves left in the tank, they may not be able to carry on for much longer.
"Essentially, a zombie business is one that is on the edge of insolvency but has been holding on, often for a prolonged period of time. An insolvent business is one that is unable to pay its debts when they fall due, or a business that has debts greater than the value of its assets. The danger for businesses that are teetering on the edge is that any change of circumstances, such as a rise in interest rates, the loss of a major customer, or suppliers upping their prices, will mean that they will not be able to hang on any longer."
R3 identifies three defining features of a zombie company: having to negotiate payment terms with suppliers; struggling to pay debts; and, facing the probability that if interest rates rise, they will be unable to service debts at all.
Figures released separately from PwC today show that a total of 3,927 companies became insolvent in the second quarter of 2012, including 664 in the construction sector, 472 in manufacturing and 426 in retail.
The retail sector had the highest number of businesses that will be unable to pay their debts in the event of an interest rise, according to R3. More than 18% - 31,000 businesses – are in this position. Similarly, 16% of the construction sector is only able to pay the interest on their debts and not pay down the principal debt itself.
Since the start of 2011, over 21,000 jobs have been lost from failures of High Street retailers.