COVID-19 creates thousands of 'zombie businesses'

Suban Abdulla
·3 min read
A new report has found 93,000 businesses were significantly distressed in the first three months of 2021. Photo: Nathan Stirk/Getty Images
A new report has found 93,000 businesses were significantly distressed in the first three months of 2021. Photo: Nathan Stirk/Getty Images

The coronavirus pandemic has seen the number of UK firms in significant financial distress increase at the fastest pace since 2014, according to a new report. 

Research by insolvency specialists Begbies Traynor (BEG.L) warned the "dam of zombie businesses could be about to break" as UK government's COVID support comes to an end this summer. 

The study defines "significant distress" as companies with minor county court judgments filed against them or which have a sustained or marked decline in key financial ratios and indicators such as working capital, profits and net worth.

It found 93,000 businesses were significantly distressed in the first three months of 2021 — this included the one year anniversary of the coronavirus crisis and first national lockdown. 

Overall, there were 723,000 companies suffering. This was a 42% increase over the past year, the report said. 

Begbies Traynor found that those in financial difficulty spanned across all 22 sectors analysed by its study. 

Businesses in the logistics and real estate industries saw a sharp rise in hardship over the first quarter.

It highlighted the latest lockdown, which forced non-essential businesses to close from 5 January for up to two months as a contributing factor in the first Q1 figures. 

Christina Fitzgerald, vice-president of insolvency and restructuring body R3 said: "The economic damage caused by the pandemic is starting to be reflected in levels of insolvency, but government support has postponed rather than prevented the true picture being shown in insolvency levels to date."

READ MORE: Brexit and COVID combination hit UK's firms' first quarter export sales

The latest government Insolvency Service data revealed insolvencies in March 2021 rose by 44.8% to 992, compared with February’s figure of 685, and were down 19.7% on 1,236 reported in March last year.

Fitzgerald added: "As lockdown restrictions continue to unwind, there are reasons to be optimistic. Many businesses have adapted and reinvented themselves during the pandemic and may be in a better position for the coming months as a result.

"We may also see consumer spending increase, but companies need to be aware of the risks of over-trading if they don’t have the cashflow needed to cover the full costs of reopening and restocking. They need to plan for a sustainable reopening of their businesses."

It comes after separate research showed companies blamed a double whammy hit from Brexit and the coronavirus pandemic for decreased export sales in the first three months of this year.

The study by the British Chambers of Commerce (BCC) showed the percentage of businesses reporting decreased export sales, rose to 41%, up from 38% in the previous quarter.

Hannah Essex, co-executive director of BCC said: "Given that export sales are at some of the lowest levels ever recorded in the history of our data, the fact that situation is continuing to deteriorate is concerning.

She added that the figures reveal that "UK exporters are currently facing a range of issues that go beyond" those created by the COVID pandemic.

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