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Zombie alert: SMEs face financial difficulty as they invest too quickly
Report warns of more zombie companies as SMEs face continued struggle to grow
Britain could be plagued by a host of zombie companies within the next year, as more small and medium-sized businesses face financial distress, a leading study has found.
The number of companies in “significant” difficulty has increased by 40pc over the past year from 176,677 in the second quarter of 2013 to 237,362 this year, marking a protracted period of deterioration for a growing group of struggling businesses.
A potential interest rate rise of 1pc as early as November could leave a large proportion of these SMEs, who were burdened with debt after the recession, in dire straits, according to insolvency practitioners, Begbies Traynor. The study showed that while the number of SMEs facing financial ruin had increased, the volume of large corporates in distress fell by 9pc to 19,507 over the period.
“The deteriorating fortunes of SMEs spells bad news for the economy at a time when there are a number of near-term challenges on the horizon for UK businesses, including political change, a stubborn lending environment and the prospect of interest rate rises,” said Julie Palmer, partner at Begbies Traynor.
While business confidence is returning — recent reports have found that morale is at a 22-year-high — this is contributing to the latest rise in distress levels, the report found, as SMEs overstretch in a drive to invest and grow without financial support.
“While low interest rates and creditor forbearance continue to ensure that businesses are kept off the critical list, you just need to scratch beneath the surface to see clear signs of a twin track economy. While larger corporates have taken full advantage of the market opportunities available to them, a growing number of SMEs are overtrading and risk falling at the last hurdle,” said Ric Traynor, chairman of Begbies Traynor Group.
“The UK needs SMEs to be able to take on new orders, recruit staff and invest in growth if they are going to contribute to the broad-based economic recovery. But without adequate funding in place, this kind of investment can only be achieved by overstretching their finances, leaving them little leeway should things take a turn for the worse or if growth accelerates, leading to greater working capital needs — a risky strategy at a time of growing political and monetary policy uncertainty.”