A recent study has shown that Scotland, along with Northern Ireland, has the highest rate of so-called ‘zombie’ companies across the whole of the UK.
The study, carried out by insolvency trade association R3, shows that there are 30,600 such companies in the country, accounting for 18 per cent of going concerns in Scotland; twice the national rate.
To be classed as a ‘zombie’ company, the business is defined as being only able to service the interest on its existing debts, rather than the actual debt.
The research also found that seven per cent of businesses were struggling to pay debts on time, with another seven per cent admitting to presently renegotiating their debts.
Talking about the findings, R3 Scottish council member, John Hall said:
“Any change in circumstance could push many of these businesses into insolvency as they have no financial flexibility to cope with increased costs.”
In turn, this lack of financial breathing space renders them incapable of investing in new equipment, services and products. Moreover, the lack of training courses for existing staff results in service levels declining, whilst new staff recruitment is non-existent. This all contributes to ongoing economic instability.
Many companies able to reduce their debt are looking at alternative methods of finance in Scotland though. Invoice discounting and factoring are increasing in popularity, for example; allowing firms to boost cash flow effectively without increasing levels of debt.
In the construction and real estate sectors in particular though, the instances of zombie companies seems to be on the increase, which could worsen as long as the economic situation is stagnated.