Insolvency trade body R3 suggests 30,600 Scottish companies only managing to service interest on debts
The number of so-called 'zombie' companies operating in Scotland is double that of the rest of the UK, insolvency trade body R3 suggests.
This equates to 30,600 companies operating in Scotland, with similar rates reported in Northern Ireland.
Zombie companies, defined as those who are paying the interest on debt but not able to reduce the principal debt level, now account for 18 per cent of Scottish businesses, the R3 research suggests.
Those companies are generating just enough cash to service debts meaning lenders are reluctant to call in loans.
Compounding the issue is the bank's reluctance to call in loans to avoid making further losses and a reluctance to lend to zombie companies, meaning they can't invest and trade towards profitability.
Seven per cent of Scots and Northern Irish firms surveyed said they were struggling to pay their debts on time and the same percentage said they were negotiating payment terms with their creditors.
R3 council member for Scotland John Hall said: “This means that there are an estimated 30,600 ’zombie’ businesses in Scotland which are only just staying afloat by paying the interest on their debt.
“Any change in circumstance could push many of these businesses into insolvency as they have no financial flexibility to cope with increased costs.
“Many of these businesses may continue to exist for several more years and be unable to invest in equipment or training for staff, which is likely to contribute to further economic stagnation.”
“Given that the Governor of the Bank of England, Sir Mervyn King, gloomily predicted that Britain, “may be in for a period of persistently low growth” there is real concern that we may be about to experience large scale corporate failures.”
R3 said the UK rate of zombie companies averages nine per cent, equating to around 160,000 businesses.
The rate in Greater London is estimated to be around 17 per cent and nine per cent in the North East of England.
The Bank of England's most recent inflation report, published last week, revealed company liquidations have been lower than expected given the number of loss-making enterprises is outstripping liquidations by a third.
Output forecasts from the Bank of England remain gloomy, and the bank's governor, Sir Mervyn King said “...the chances of a rapid recovery are a good deal less than we thought”.
Sir Mervyn said loose monetary policy, historically low interest rates and banks' reluctance to write-off bad loans were largely to blame for the fact UK economic output has stagnated since 2010.
The Bank of England estimates around three in every 10 companies in the UK are now loss making, though the rate of insolvency is far lower than during the recession of the early 1990s.
Hall added: “The phrase ‘zombie business’ has been bandied around quite freely and looking at companies that can only service the interest they owe, but not the debt itself, is a practical definition of this term.
“I would add that the phrase also extends to those companies who are currently over-geared and cannot pay back their debt in full.
“We know that banks are displaying greater forbearance in relation to existing debt, but when a business cannot get extra lending it will be unable to expand.
“Others would argue that this stagnation ties up capital that could be used by other, healthier businesses.”
Corporate insolvency rates in Scotland are at an historically high level.
Over the last four quarters 1,582 Scottish companies have gone bust which is more than twice the number which went bust during the whole of 2009.
Hall said: “There is an argument that the benign interest rate regime and more flexible response from lenders has kept corporate failures artificially low.
“This is certainly the case in England and Wales but we can see that Scotland still has a very high rate of failures and an enormous number of ‘zombie’ firms waiting in the wings for the slightest adverse change to close them down.”