Low-Interest Rates Keep More And More Companies Artificially Alive
The half-dead have been going on in some countries since last year – literally! Because the number of those zombie companies that artificially keep themselves alive through loans rose significantly in the Corona year. Above all, more and more small businesses are currently struggling to survive.
According to the definition, companies are called zombies if they cannot cover the interest burden on borrowed capital with their profits for three years in a row. The world’s most widely used credit agency, Creditsafe Germany, has devoted itself to the latest developments in the horror business and has evaluated the latest figures. The bottom line: A continued low-interest-rate fuels the march of the half-dead and brings new “zombies” to life.
The continuing low-interest-rate policy is considered a breeding ground for the existence of zombie companies. An organic market shakeout is thus thwarted. As a result, a trend towards an entire zombie economy could be observed even before the Corona year. Nevertheless, no increase has been the same as the current one in 2020. The rate rose from 9.8 percent to 11.3 percent within one year, even though not all annual financial statements are available (around 1/5 have been submitted so far). It remains to be seen to what extent the quota will change once it is complete.
The Large Increase In Zombie Businesses Among Freelancers And Traffic
Although the pandemic hit the entire economy hard, individual industries suffered more than others. There are clear differences considering the number of zombie companies in the respective areas. As in the previous year, a particularly high value can be seen in the finance and insurance services sector (37.0 percent).
However, this can be traced back to accounting peculiarities. In second and third place are traffic & logistics (18.7 percent) and freelancers & scientific and technical services (26.1 percent). This is also where the greatest increase can be seen compared to the previous year.
It should be mentioned that the analysis by Creditsafe only relates to larger industries, as more annual financial statements from the previous year are currently available in these sectors. This allows more meaningful values to be determined.
Suddenly A “Zombie”: Small Businesses Are Suffering Like Never Before
Although many annual financial statements for the holistic analysis of 2020 are still missing, the analysis by Creditsafe shows a noticeable increase: While large companies continue to lead the heavily indebted, small companies for the first time have almost the same rate of zombie companies as the big ones. This high value is not unusual for large companies, as it is generally easier for them to bear the high-interest burden and consider it in their tax considerations. The reserves are larger, and the
business is usually more established.
Small businesses have struggled harder to survive these years. An increase in the small “undead” of almost 3 percent can probably be attributed to a lack of profits and the continuing low-interest rates. An effect on medium-sized companies has not yet been observed. Here the rate has even decreased minimally.
Potential business partners should inquire exactly how things are going with their counterparts. The debt burden of companies, especially when interest rates rise, can threaten their very existence and hurt their creditworthiness. Zombies, therefore, show low values here. Companies should be aware of the risk associated with their business partners so that the half-dead frenzy does not affect their own business.