Introducing Zombie Businesses - Trading (Somehow) But Almost Dead

They survive - but only just. They have debts and relatively high gearing, but with the support of creditors and low interest rates these businesses are just about able to service their debts. They are barely profitable and not growing, but they trade on, and on.Who are they? Zombie businesses. And one view is that zombie businesses are a significant factor in holding back economic growth in the UK.

What a strange term - but one I'm coming across more regularly. A zombie business is one which has almost failed (died) but somehow manages to survive against the odds. Businesses that are living, but which are essentially dead.

They are further described in this Telegraph article like this:

Zombie companies are only just generating sufficient cash to pay the interest on their debts and keep creditors at bay. They are in no position to deal with unexpected costs, lost orders or bad debts or to fund increases in working capital and invest in growth.”

These businesses act as a drag on the recovery by taking sales from healthier rivals and using assets, including people, that could better be deployed by growing companies.

A similar view has been provided by accountants Ernst & Young who have identified the existence of zombie businesses as a key reason why the number of company insolvencies has not grown significantly despite the length and depth of the recession economic downturn:

This quote from the E&Y article explains:

"[Banks] do not want to be seen to be pulling the financial rug from underneath companies that are facing difficult trading conditions," the accountant said.

Alan Hudson, E&Y head of restructuring in the UK, said while zombie companies were still operating, they were taking market share from viable companies that should be growing and boosting the economy.

What should be done about zombie businesses? Should the banks (and other creditors) take a much more robust, aggressive approach to putting these businesses into administration or liquidation?

Alternatively, as this article discusses, there might be an opportunity to nurse zombie businesses back to health?