South East: ‘Zombie businesses’ on the up, says R3

The number of ‘zombie businesses’ in the South East has increased dramatically in the past nine months from 5,000 to 23,000.

Local insolvency experts warn the figures suggest the economic recovery is putting pressure on some businesses rather than making their lives easier.

Experts from the Southern Committee of R3, which brings together insolvency practitioners from local accountancy, legal and recovery firms, say thousands of businesses risk getting stuck in a state of limbo where they are still in business but with little chance of growth.

Zombie businesses are defined as those that can only pay off the interest on their debts rather than paying off the debts themselves. In November 2013 the number in the South East dropped to a record low of 5,000. But latest figures show the number has skyrocketed to 23,000.

Andrew Watling, chairman of the Southern Committee of R3, the insolvency trade body, and a director at Quantuma in Southampton, said: “The first flush of growth generated plenty of cash for businesses but now some are experiencing the side-effects of growth too. Over-trading and late payment can easily put businesses with bulging order books in a position where cashflow becomes a major headache.

“Businesses will get into trouble if they’re trying to run before they can walk and don’t get paid quickly enough for the work they’re doing. Access to new finance is still tight so businesses low on cash have limited options to give themselves some breathing room.

“Making the minimum payments on debts or renegotiating payment terms with creditors can free up some extra cash and buy some time, but it’s not a long-term solution.  Healthy cashflow is critical.”

Among the members of R3 are representatives from Moore Stephens, Chantrey Vellacott DFK and Blake Morgan.