Not every struggling business is on the brink of collapse—some are stuck in a financial limbo. These are known as zombie companies: businesses that can cover their operating costs and debt interest but lack the resources to invest, grow, or innovate. With rising interest rates and tighter credit conditions, the number of zombie companies in the UK is increasing.
In this article, we explore what defines a zombie company, how to spot the warning signs, and what businesses can do to avoid falling into financial distress.
Number of UK businesses that are ‘at risk’ of being or becoming ‘Zombies’
Statistics from BDO (March 2024)
Zombie companies often show subtle signs of distress—like repeated CCJs, requests for early payments, and a focus on cash flow over profitability. Left unchecked, these businesses can pose serious risks to your supply chain and financial stability:
Zombie companies come in various forms and are created through different processes. The breakdown below covers the different types of zombies you may encounter.
Debt Zombie — The most prevalent type of Zombie company is one with moderate to significant debts. It generates adequate profits to cover the debt's interest but not enough to repay the principal amount. The company may sometimes lag behind on debt payments and subsequently catch up. In many instances, the lender is fully aware that the company is a zombie but opts to continue collecting interest payments rather than pursuing insolvency proceedings, which is more advantageous.
Debt zombies teeter on the edge of insolvency and may struggle to make timely payments to their unsecured creditors. They are also highly susceptible to increases in interest rates.
Cash injection zombie – These companies continue to operate despite running at a loss, thanks to occasional cash injections from a third party, such as the owner or the government. Zombie companies may receive cash injections for various reasons, such as when a small business owner prioritises sustainability over profit, when external investors seek to protect their investments, or when the government intervenes to prevent the failure of a company deemed too big to fail.
Various factors can lead to a business becoming a "zombie company," and it's important to note that this is often not an intentional decision of the business owner. It often results from challenging circumstances such as unfortunate timing and the state of the economy.
A business becomes a zombie if it's happy to just exist. For example, a bank or lender might recognise a business as a zombie if it's still receiving interest payments from the company; they'll probably be reluctant to try to resolve any issues with historic debt as long as they're receiving interest payments.
Also, if a business director provided personal guarantees for the business's finances when they initially established it, they are unlikely to consider voluntary liquidation because it will make them responsible for repaying the debts if the company fails.
No business ever sets out with the intention of stagnating. However, if a company is not performing as well as it wants to, it can be tempting to remain stagnant rather than try to get back up and running again.
These companies are highly susceptible to even the slightest economic shock, posing a significant challenge to the wider business landscape. The lack of productivity from zombie companies is a drag on economic growth.
The Office for Budget Responsibility (OBR) has identified low investment by firms and low interest rates as the culprits that sustain these zombie companies, leading them to have no desire to enter voluntary liquidation, which in turn causes a significant drain on the economy.
Zombie companies pose a hidden threat to the UK economy—and to their suppliers, customers, and partners. If your business is showing signs of financial strain, such as mounting debt, poor cash flow, or multiple CCJs, it’s time to act.
For over 20 years, CoCredo has been a leading provider of online company credit monitoring and UK and Ireland business credit scores, financial data, and relevant information on companies to businesses and their suppliers in the UK, Ireland, and around the world, effectively safeguarding them from bad debt.
Don't let bad debt from a zombie company affect your business. Use CoCredo's company credit check services to stay informed and protected.
We gather credit score information from the top credit providers across over 240 territories. Access all the crucial data you need in one convenient report. Stay informed about your customers' business activities and financial status through our company credit monitoring services. Receive real-time daily or weekly updates and risk alerts that empower you to make confident and timely business decisions.
To verify a business’s credit score or obtain a credit report for your business, utilise our free trial company online credit check. This will allow you to see how we can assist you. Alternatively, you can register your business and set up an account with us.
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