146,000 ‘zombie businesses’ are teetering on the edge of insolvency, R3 has warned.

According to research by the insolvency trade body, 8% of UK businesses say that they are only able to pay the interest on their debts, but not reduce the debt itself.

R3 measured four ‘zombie indicators’, any of which could indicate that businesses are nearing the point of insolvency, but are still able to hang on, neither failing nor thriving.

These ‘zombie’ signs are:

• Just being able to pay the interest on debts, but not reduce the debt itself;
• In the event of a rise in interest rates, the business will be unable to pay its debt at all;
• Struggling to pay debts when they fall due;
• Having to negotiate payment terms with suppliers.

“146,000 businesses in the UK are only able to pay the interest on their debts but not reduce the debt itself – this is a staggering number,” said Lee Manning, R3 president. “The implication here is that these businesses have been ‘running on empty’ for quite some time now and with no reserves left in the tank, they may not be able to carry on for much longer.

“Essentially, a zombie business is one that is on the edge of insolvency but has been holding on, often for a prolonged period of time. An insolvent business is one that is unable to pay its debts when they fall due, or a business that has debts greater than the value of its assets.

“The danger for businesses that are 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 that they will not be able to hang on any longer.”

The retail sector featured most prominently across three out of the four zombie business indicators. It has the highest proportion of businesses that will be unable to pay their debts in the event of a rise in interest rates – 18%, which equates to 31,000 businesses. However, the construction sector has the largest proportion of businesses that are only able to pay the interest on their debts – 16%, which equates to 37,000 businesses.

Manning added: “Devastation on the high street is well recorded. Since the start of 2011, over 21,000 jobs have been lost from the failures of major high street names, but we are yet to see the volume of construction failures that we would expect.

“With many capital expenditure projects coming to an end, cuts in public sector budgets and work from the Olympics having recently dried up, we can expect to see some of these businesses fail. Construction may well be the next big casualty from this recession.”

BDRC Continental conducted 502 telephone interviews with small, medium and large business owners and financial directors between 6th-13th June 2012. Strict quotas are set by size, region and sector and the data weighted to be representative of the ONS profile of UK businesses, each with an annual turnover above £50,000. The respondent in each case is a senior financial decision maker.