Coronavirus: Business rescue package has ‘delayed the inevitable’
A wave of “zombie companies” kept afloat during lockdown are on a cliff-edge going into the autumn, experts say.
Analysis by the BBC shows a surge of firms went bust in March, then the rate slowed in the first few months of lockdown amid a £160bn support package.
However, the Institute for Fiscal Studies (IFS) says many firms have piled on debts and will struggle.
The government said it would “adjust support” as the economy reopens.
So-called zombie companies are businesses that function day-to-day, but cannot pay off the full debt they owe or find cash to invest and grow.
Julie Palmer, a partner at the financial consultants Begbies Traynor, said: “This crisis will force many zombie companies out of business.
“While these were clinging on to survival prior to the pandemic, many will now have become simply unviable due to high levels of debts and poor sales.”
Stuart Adam, from the IFS, said: “Many firms have been tided over during the period of hibernation partly through loans and tax deferrals, but those mean piling up debts that will make it harder for them to carry on in the longer term.”
Insolvency notices have slowed from April
More firms have gone under this year so far
The BBC Shared Data Unit looked at how many companies had posted insolvency notices in the London Gazette, the official paper of record for public notices. A company is insolvent when it can’t pay its debts.
Our investigation found there was a spike of 4,200 insolvencies in March as the UK headed into lockdown.
The rate of insolvencies slowed over the next three months, with a further 5,000 businesses insolvent – a drop of 23% compared to the same period last year.
As well as government support, it is thought changes to insolvency law and reduced court services have contributed to the slowdown.
Firms in the information and communication sector saw the largest increase in insolvencies.
‘People are just hanging on’
Business owner Richard Millward is working as a driver for a supermarket while he watches his long-standing firm run out of cash.
For 30 years, he has worked in the events industry, putting on large-scale gatherings such as the London Marathon.
He is currently working as a driver for Waitrose, with no prospect of events income until at least April next year.
His business has benefitted from the furlough scheme and a business rate relief grant – part of billions of pounds in government support and legal changes to help firms cope with Covid-19’s impact.
But his company of 17 years has ongoing costs and Richard is facing the choice of holding on, or closing it down before it runs out of money.
He knows of several companies that have gone into administration or already closed down.
“It’s sad and also quite worrying,” he said.
“We’re going to lose an awful lot of the skill, the talent pool that we have. I think a lot of people are just trying to hang on for as long as possible.”
What do the experts say?
In separate research, financial consultants Begbies Traynor said 527,000 businesses were in “significant financial distress” at the end of June.
Ric Traynor, its executive chairman, said businesses would have to deal with a “toxic mix” of reduced sales and increased debt.
He said: “Many of the support measures will have simply delayed the inevitable, with the can being firmly kicked down the road.”
The IFS’s Stuart Adam said: “I think pretty much everyone agrees a perfect recovery is not realistic, it’s going to be bad.”
But he said investment in new businesses was key to recovery.
“Getting new businesses starting up and hiring people is exactly the kind of thing that needs to happen over the coming year or two,” he added.
‘I set up a business during lockdown’
While many companies are struggling, some people have been using the lockdown to launch new business ventures with more than 170,000 new firms registered from April to June.
Sectors leading a bounce-back were online retail, real estate, construction and takeaway food.
One of those new start-ups is run by Shahid Hussain, from Essex, whose food delivery business now has eight branches.
“People said we were crazy to be setting up a business during Covid when everyone was going into lockdown.
“What we realised was that Covid was going to fundamentally change the way we eat. People wanted fast delivery food, but restaurant quality.
“It’s going really well. The delivery market was picking up even before Covid; it just accelerated it. We definitely launched at the right time. It’s going so well, we have got plans to open two or three outlets in the next week or so.”
New business registrations
Companies by incorporation date
Nurse Tom Parkinson, 25, is hoping to register his baking business soon, making sourdough bread from home alongside his NHS work.
He said: “I think there’s going to be a revival, I think more people are into food that’s come from a local producer and done with a bit of love and care, I think there’s a market for it.”
The government said its job retention scheme had protected more than nine million jobs and the next stage of support included a 15% VAT cut for some businesses, the Coronavirus Job Retention Scheme Bonus, and investment in greener buildings and homes.
A spokesman said: “As the economy reopens, we will continue to look at how to adjust our support in a way that ensures people can get back to work, protecting both the UK economy and the livelihoods of people across the country.”