Scots ‘zombies’ teeter on the brink of crisis

The financial crisis and prolonged recession have left nearly one in ten Scottish businesses in a “zombie” state, unlikely ever to return to healthy profitability.

The latest survey by insolvency trade body R3 revealed 14,000 firms, or 8 per cent of all businesses, were able to do no more than pay the interest on their debts.

John Hall, Scottish R3 council member, said: “Our survey indicates that enormous numbers of Scottish businesses are simply treading water financially, hoping for an upturn in the market to rescue them.

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“Unfortunately, the indications are that this will not happen for some and that they may face closure in the months and years to come.”

The group defines a “zombie” business as one that is on the edge of insolvency but has been holding on, often for a prolonged period of time, without going bust. Such firms are not able to reduce their overall debts and can only just meet their interest payments.

Data suggests the retail and construction sectors are the worst affected. Hall added: “The danger for businesses teetering on the edge is that any change of circumstances – such as a rise in interest rates, the loss of a major customer, or suppliers upping their prices – will mean they won’t be able to hang on any longer.”

R3’s survey of Scottish and Northern Irish businesses showed 44 per cent experienced a fall in profits in the three months to July, while 40 per cent saw sales decline and 17 per cent said their market share fell.

The latest official figures showed a record number of Scottish companies went bust last year and experts have been warning of even higher failure rates in 2012.

Figures from the UK government’s Insolvency Service showed 1,526 Scottish businesses fell into administration, liquidation or receivership in 2011 – the equivalent of four each day.

Analysts blamed a lack of bank lending, public sector cutbacks and weak consumer spending for the rise in insolvencies.

However, this week data from information firm Experian suggested the number of Scottish firms going bust fell to a two-year low in July, adding to hopes the economy is in better shape than official figures suggest.

Andy Willox, policy convenor for the Federation of Small Businesses in Scotland, said firms were struggling in the face of problems such as tight credit conditions and increased levels of late payment from big companies, but they were not giving up without a fight.

“It is difficult to dispute that there are many Scottish businesses, and their owners, facing very difficult circumstances,” Willox said.

“But they’re hardly resigned to their fate – many are working exceptionally hard, others are introducing new services, products or ways of working.”

He said it should be a priority for government on all levels to tackle problems such as restricted bank lending and the late payment culture, which are currently putting many smaller businesses in a tight spot.