Recovery creates cashflow problems for Northern firms

By October 8, 2014Finance, News

The number of Northern businesses just paying interest on their debts has risen to 45,000 – up from 10,000 in May 2013, according to research by insolvency trade body R3.

The figures show that 13 per cent of businesses in the North are in this position, the same number as when figures peaked in February 2013.

Paying just interest on debts and not the debt itself is a key indicator of ‘zombie businesses’. However, rather than a return of the ‘zombie business’ phenomenon, insolvency practitioners suspect that late payment and cashflow problems associated with growth are behind the latest rise.

Richard Wolff, North West chair of R3 and Head of Corporate Recovery and Insolvency at JMW Solicitors, says: “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 cash flow becomes a major headache.

“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 cash flow is critical.”

The research, carried out by BDRC, shows that 13,000 businesses in the North (4%) are struggling to repay their debts, while 29,000 (8%) are negotiating payment terms with their creditors and a similar amount would be unable to pay if there was a small rise in interest rates.

‘Zombie businesses’ emerged after the 2009 recession when thousands of businesses that might have been expected to fail were kept afloat by a combination of low interest rates, lenient creditors and a sluggish recovery.

Richard Wolff adds: “Just paying the interest on debts or constantly renegotiating with creditors could leave businesses in limbo – they will be in business but with little chance of growth, like the archetypal ‘zombie’ company.

“Whereas the original ‘zombie businesses’ have had the benefit of years of low interest rates and lenient creditors, those conditions are probably coming to an end. A rise in interest rates and sustained economic growth will certainly encourage creditors to get tougher.”

 

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