Business development · 30 October 2017

The dangers of doing business with zombie companies

Zombies office workers businessman characters. Vector flat cartoon illustration
With record low interest rates, zombie companies can survive longer than expected by relying on cheap credit
Grid Law founder David Walker returns ahead of Halloween to warn Business Advice readersof the risksof 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:

  1. Erratic payments

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;

  1. 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;

  1. Falling profits

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;

  1. 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

  1. 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.


 
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ABOUT THE EXPERT

David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry, advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights.

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