Nearly 10% of UK businesses only paying interest on debts

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139,000 businesses in the UK are only paying the interest on their debt and not repaying the debt itself.

New research has revealed that the number of businesses in this position – equivalent to 8% of all UK businesses – has returned to levels more in line with previous years after falling to 69,000 last year (4%).

Only paying off the interest on debt is often a sign of a ‘zombie business’ – a business only surviving because of low interest rates – but insolvency and restructuring trade body R3, who carried out the researched, said the new figures do not necessarily indicate a return of the ‘zombie’ phenomenon.

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Andrew Tate, president of R3, said that apart from the initial shock of the EU referendum result, the business environment has so far been relatively benign over the course of 2016.

“It’s more likely that otherwise healthy businesses are taking advantage of record low interest rates to keep cash in their business,” he commented.

Tate continued: “Other indicators of acute distress are all down such as having to negotiate payment terms with creditors and being unable to repay debts if there was small increase in interest rates. This suggests that businesses just paying the interest off aren’t as lifeless as they may have been in previous years.”

According to the R3/BDRC research, 33,000 businesses are struggling to pay debts when they fall due. This represents a decrease from the same time last year when 55,000 were in that position; there were a peak of 134,000 businesses in this position in May 2013.

Tate commented: “While there is little immediate cost for otherwise healthy businesses borrowing more at the moment, the danger is that problems are being stored up for later on. Businesses may run into trouble when interest rates start to rise again or if fresh borrowing is needed to cope with a downturn in fortunes, especially if businesses are already borrowing at their limit.

“It’s all very well just paying off the interest on debts at the moment, but businesses in this position also need to make sure they have enough cash to hand to make any balloon payments on their debts when they are due.

“Businesses should tread carefully and plan ahead to make sure short-term needs don’t jeopardise long-term survival,” Tate concluded.

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