Banks backing zombie firms are stifling growth

IS your local economy starting to resemble a scene from The Walking Dead with hordes of zombie firms sucking the lifeblood out of new-born enterprises, depriving infant firms of the nourishment of finance they need to help them grow and prosper into healthy firms capable of job and wealth creation?
Eileen Blackburn of French Duncan. Picture: SNSEileen Blackburn of French Duncan. Picture: SNS
Eileen Blackburn of French Duncan. Picture: SNS

If any of that post-apocalyptic economic landscape sounds familiar, might it be time to kill off the zombies to put them out of their misery and help save healthier firms from following them?

According to the Adam Smith Institute, the answer to that is an emphatic yes. Its doom-laden report, The Trading Dead, claims that over 100,000 zombie firms could cause a lost decade of economic stagnation, pointing to the fact that the unusually low level of corporate insolvencies suggests that zombie firms are holding up capital and labour that could be used productively elsewhere.

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The report suggests that record low interest rates and the willingness of banks to show forbearance to unprofitable firms is damaging productivity, undermining competitiveness and preventing workers and money finding its way to the companies of the future.

Zombie firms are defined as heavily indebted firms that can generate enough revenue to pay down debt interest but not principal debt and are dependent on low interest rates to continue doing so. The report suggests that private sector rescue of zombie firms is possible, but only for some.

This critique is valid. After all, there has to be an element of churn in a vibrant, active economy and zombie firms do indeed risk dragging down some financially healthy firms with rosy prospects by depriving them of the funds they need to grow and prosper.

While there is no magic bullet to resolve the issue of zombie firms threatening the financial health of other enterprises, the reluctance of banks to lend over recent years and the subsequent mounting prominence of private equity finance and of the role played by Scottish Enterprise and other agencies as alternatives to the traditional funding model of a bank overdraft could perhaps help save and transform those distressed companies worth saving.

• Eileen Blackburn is partner and head of business recovery at French Duncan

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