Fewer zombies but national stagnation a concern – R3

BUSINESSES in the Midlands are experiencing significantly fewer signs of distress, but a stagnant national economy could hamper regional recovery in 2013, according to research published by insolvency trade body R3.

R3’s quarterly Business Distress Index highlights that the number of businesses in the region admitting to regularly using their maximum overdraft facility is around a half of the total of six months ago, falling from 31% to 18%. 

There has also been a significant reduction of 22 points, from 51% to 29%, in the number of Midlands businesses experiencing reduced sales volumes, whilst 34% say they are experiencing decreased profits, compared to 41% six months ago.

The R3 research also shows that in the last quarter, the number of ‘zombie’ businesses in the region – those that are able to pay the interest on their debts but not reduce them – has halved from 12% to 6%. 

R3 Midlands Chairman Matthew Hammond, a partner at PwC in the region, said:  “Whilst many local businesses appear to be coping with the economic challenges, the stagnating national economy remains a threat.  

“A healthy regional economy requires national activity at both ends of the economic cycle – it needs business growth and expansion, as well as the recycling of capital following business failure. 

“Unfortunately, R3 research shows that, nationally, there has been little improvement to those businesses that are consistently reporting signs of distress. 

“There are a significant number of businesses being kept alive by the forbearance of banks, other key creditors and favourable interest rates, which is enabling them to stay afloat but make no in-roads on their debt. However, they are in a precarious situation with little prospect of growth. Any change in circumstance, such as a loss of a major customer or increased creditor pressure could easily push them into insolvency.” 

On a more positive note, R3’s latest research shows a sizeable number of regional and national businesses are relatively stable; with nearly half of businesses (46% both nationally and in the Midlands) reporting no distress signs at all.

Hammond added: “It is encouraging that around half of businesses are not in a distressed situation, which is a considerable improvement on the figures two years ago. However, what is of most concern is the businesses that have existed in a distressed situation for some time and are likely to have reported distress signs throughout the year.”