The pandemic certainly threw the business world a lot of curveballs and we are still feeling the repercussions now. It is said that zombie companies that have survived since will now be wiped out by high interest rates.
Talk was made of the pandemic exposing so-called zombie companies, by definition they were companies that are indebted businesses that, although generating cash, after covering running costs, and fixed costs (wages, rates, rent) only have enough funds to service the interest on their loans, but not the debt itself.
Many of these companies may have been propped up by the various loan schemes that the UK government rolled out to help businesses through, but now will be unable to keep up. But with interest rates now at 5 per cent – up from 0.1 per cent less than two years ago – and set to rise further, their future looks bleak.
The COVID-19 era protections have since been withdrawn and businesses are now faced with having to pay back debts in an increasingly hostile trading environment, with inflation soaring, costs rising across the board, supply chain issues persisting and the cost of living crisis pushing consumer sentiment and spending down. This is amid rising energy bills, interest rates and labour costs, as well as falling consumer confidence.
This seems to be backed up as insolvencies in England and Wales have reached a 14-year high.
All of this is being coupled with more stringent behaviour being exhibited by HMRC, reports are showing that tax defaulters are being targeted as winding up petitions have increased at a level not seen since the pandemic. The government’s own figures released on July 18th revealed that there were 260 compulsory liquidations in June 2023, 77% higher than in June 2022.
It is also interesting to note that many experts also believe that zombie firms actually harm solvent, more successful companies around them. Barron’s have even stated that they actually ‘eat up’ economic growth simply by being part of the wider supply chain.
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