Around 22,000 regional businesses are only paying the interest on their debts, an issue which is often a key trait of ‘zombie’ businesses.
Neil Harrold, North East chair of R3,
That’s the conclusion of new research by insolvency trade body R3, which found that 13% of the companies it surveyed across the North East, Yorkshire and Humberside are only currently able to pay the interest on the money they owe and not the debt itself.
Elsewhere in R3’s latest Business Distress Index (BDI), which reports regularly on the levels of growth and distress of companies across the UK, ten per cent of regional firms said they were having to negotiate payment terms with creditors, while seven per cent were struggling to pay their debts when they fell due.
Only paying off the interest on debt is often a sign of a ‘zombie business’ – one which is only surviving because of low interest rates.
But while the regional proportion of such firms is five per cent higher than the national average, Neil Harrold, chair of R3 in the North East and a partner with Hay & Kilner Solicitors, believes the new figures do not necessarily indicate a return of the ‘zombie’ phenomenon which came out of the 2008 economic downturn.
Neil Harrold says: “Apart from the initial shock of the EU referendum result, the business environment has so far been relatively benign over the course of 2016, and we think it’s more likely that otherwise healthy businesses are taking advantage of record low interest rates to keep cash in their business.
“Other indicators of acute distress are generally down, which suggests that businesses just paying the interest off aren’t as lifeless as they may have been in previous years.”
Neil Harrold is advising those firms that are currently increasing their borrowing to help them meet their financial responsibilities to be aware of the problems that could arise in the future as a result of these actions if and when bank interest rates rise.
He continues: “It’s all very well just paying off the interest on debts at the moment, but businesses in this position also need to make sure they have enough cash to hand to make payments on their debts when they are due.
“While there is little immediate cost for otherwise healthy businesses borrowing more at the moment, the danger is that problems are being stored up for later on. Businesses may run into trouble when interest rates start to rise again or if fresh borrowing is needed to cope with a downturn in fortunes, especially if businesses are already borrowing at their limit.
“Businesses should tread carefully, plan ahead to make sure short-term needs don’t jeopardise long-term survival and seek advice from a qualified source as soon as they see any issues arising that could be damaging to their finances.”
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