Grid Law founder David Walker returns ahead of Halloween to warn Business Advice readers of the risks of doing business with a firm in serious financial trouble, and reveals the signs that could help identify so-called “zombie companies”.
It’s always dangerous to do business with zombie companies. So, this is something you should be on your guard against all the time, not just at Halloween. If you find yourself doing business with them, you need to be very careful because there’s a real risk that their problems can spread to your business.
So, what are zombie companies and how can you protect yourself from them?
“Zombie company” is a phrase that was created a few years ago to describe a company that, like its flesh-eating human counterpart, is barely alive.
Zombie companies are in limbo. They’re in serious financial difficulties, on the brink of insolvency and only just surviving.
They have neutral cash flow. This means that each month they have the same amount of money coming in and going out and it’s only just enough to keep them trading.
Zombie companies often have debts and loans but they can only afford to pay the interest on the money they owe. There’s nothing left to repay any of the capital but, as they’re keeping up with their minimum repayments, the banks don’t take action to wind them up.
With record low interest rates, these zombie companies can survive longer than expected by relying on cheap credit and stretching their trade credit as far as it will go.
This is what makes them dangerous.
It’s easy to become complacent when trading with them, accepting that they’re just slow payers, but in reality, they’re passing their problems on to everyone they do business with.
Zombie companies may not be easy to spot so you have to look out for the warning signs of a company that is in financial troubles. I covered these in detail in a previous article (Five early warning signs that your client is in financial trouble) but basically, the signs you are looking for are:
Not only do they pay late, they often don’t pay the full amount due. They’re paying the minimum amount they can possibly get away with;
Deteriorating staff morale
Staff will know they could lose their jobs at any time and this will dramatically reduce their enthusiasm for the work they’re doing;
There’s every chance the zombie company will already be trading at a loss but with neutral cash flow and no money to invest into the business, any profits they are making will inevitably decline;
Deteriorating reputation and market share
With no money, there will be nothing to spend on developing new products and services. Their offering will become outdated and customers will go elsewhere
The company becoming more contentious as it fights for survival
They will likely complain and dispute everything they can in a desperate attempt to avoid or delay payment, or at least secure a discount on the amount they owe.
If you spot any of these problems in any of your clients, you need to act fast to protect your business.
In particular, you need to keep on top of your credit control to ensure you’re being paid. Remember, zombie companies are in survival mode and will often priorities payments to those who are pushing them the hardest.
It’s difficult to know how many zombie companies there are in this country, but some reports I’ve seen say they’re at their highest ever levels.
On one hand, this is worrying because with interest rates likely to rise at any time, a small increase in their monthly outgoings could be all it needs to tip them over the edge. If they owe you money when they are wound up there’s unlikely to be any assets of any value which can be used to settle their debts. If you’re too exposed, this could lead to serious financial difficulties in your business too.
However, on the other hand, if predictions are true and an interest rate rise does lead to a huge number of insolvencies this could be good news for the healthy companies that remain. The zombie companies are taking a share of the market, and without them, there should be more work to go around.
This will be a prime opportunity for growth for any business that survives the apocalypse, so here are three things you should be making a priority:
- Identifying clients who are potentially in financial difficulties. Then, limit your risk by recovering as many of your unpaid invoices from them as possible. If they are too slow in paying, don’t make your situation worse by continuing to trade with them.
- If you have debts and loans, do all you can to repay the capital so you’re in the best possible position to survive an interest rate rise.
- When the interest rate rise happens, and the number of insolvencies is increasing, look for the opportunities. For example, how can you increase your market share, or attract talent from a competitor who hasn’t survived?
If you have any questions about protecting your business from slow paying clients, please feel free to email me at firstname.lastname@example.org and I’ll happily answer them for you.
Take a look back at some of David’s recent Business Advice articles:
- How to write legally binding online terms and conditions
- Intellectual property ownership: Who should own what you create?
- Five keys that will unlock the cash in your business
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