Business Finance: ‘Could low insolvency rate be a drag on recovery?’ asks David Merrygold of PKF

IT IS hard to escape the headlines detailing the struggles of the British economy, bemoaning the state of the housing market and reporting falling high street sales.

Double-dip or not, it currently feels like the economy is bouncing along the bottom with little chance of an improvement in the near future.

To be clear, there are plenty of thriving businesses in these uncertain times. There are also many more that should be doing better but have, understandably, chosen to “batten down the hatches” and hoard cash for a rainy day – often because they fear a customer going out of business without paying.

Many of the high profile names which have fallen into administration in recent times share common flaws, most notably failing to set or even keep up with market trends.

Competition is fierce and nowhere more so than in sectors that have good internet offerings. The key then is to be bold and stay ahead of your competitors.

Yet despite the headlines, it surprises many people to learn that, generally, the insolvency profession is not as busy as the economic conditions may suggest. Some high profile appointments aside, nobody has seen the volume of formal insolvency cases that many expected.

One reason for this is that, unlike in previous recessions, banks are reluctant to “pull the plug” on customers. Whilst interest rates remain historically low, debts can at least be serviced even if long term prospects of repayment are poor. The banks, like many other businesses, have weak enough looking balance sheets without calling in debts from customers that they know cannot pay.

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The result is a generation of “zombie companies” where wealth is not being generated and inevitable business failures are delayed. The status quo of little or no growth prevails and viable businesses continue to wait for better times.

This has led some commentators to suggest, somewhat counter-intuitively, that low insolvency rates might not be a good thing. On a macroeconomic level, the theory goes, there is much to be gained from a short term spike in insolvencies to redistribute assets so they can be better employed by stronger companies to invest and grow.

Whether you agree or not, on an individual level, business leaders must plan for the future and stay lean. They must also be prepared to search out and take advantage of the opportunities available to them, such as the possibility of making an acquisition or expanding into an overseas market. Expert advice and alternative sources of funding are available if you know where to look.

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