There are two contradictory ways to look at the latest statistics on corporate insolvencies for England and Wales, which fell sharply during the first three months of the year for the fifth successive quarter. They either make a nonsense of the idea that an army of zombie companies threatens to undermine the economy's recovery, or confirm our worst fears.
There were just 3,619 compulsory and creditors' voluntary liquidations in England and Wales in the first three months of 2013. That was 5.3 per cent down on the final three months of 2012 and 15.8 per cent lower a year earlier.
The zombie argument is that banks have large numbers of overborrowed companies on their books that are continuing trading because interest rates remain at all-time lows and because lenders are reluctant to crystallise their losses on such businesses by calling in their debt. These zombies have no hope of recovery and are being kept alive because it suits the banks to do so. They're producing no growth of their own but they're also holding back healthier competitors that might otherwise be able to drive the economy forward.
If these zombies do exist, the figures suggest the banks are no closer to putting them out of their misery. It might equally be, however, that the idea of the zombie is a myth – that the fall in insolvencies reflects the recovery in corporate profitability rather than a conspiracy by the banks to massage their bad debt statistics.
I've spoken in the past 10 days to the chief executives of SME banking at two of the four big high-street banks. Both did not recognise the zombie picture. And both said it's a lot easier to call for ailing businesses to be put down than to actually do it. To which one might respond, 'they would say that wouldn't they?' But we should be fair to the banks. There is no hard evidence of the scale of the zombie problem.
On the other hand, many insolvency practitioners are convinced this is a huge issue that will have to be confronted as banks' balance sheets recover and they feel more comfortable about owning up to bad debts. R3, the trade body that represents such practitioners, claims there are 146,000 zombie businesses in the UK – and a third of them would fail immediately in the event of an interest rate rise.
There is certainly something curious about the insolvency figures. In the past 12 months, just 0.7 per cent of registered businesses in England and Wales were liquidated. The average annual liquidation rate over the past 25 years has been 1.2 per cent. How can corporate insolvencies be so far below trend when the economy as a whole has shown little or no growth?
The puzzle may be partly solved by the fact borrowers continue to enjoy interest rates at unprecedented lows. Still, the small number of liquidations has been a feature of the UK economy ever since the financial crisis .
We won't know the scale of the zombie problem for several years yet – until bank finances are so improved that they have no incentive to hold back from calling in bad debts. If, at that stage, insolvency rates are much higher than they should be given the prevailing economic winds, we will know the banks have not been entirely truthful.
Competition: Budding entrepreneurs offered the £10 challenge
Look out for the Tenner Competition, a new enterprise contest for young entrepreneurs just launched by Young Enterprise and backed by business folk including Innocent Smoothies founder Richard Reed and Moshi Monsters creator Michael Acton Smith.
The organisation hopes 250,000 pupils in 330 schools across the UK will take part in the competition – each entrant gets a £10 loan from Tenner and then has to turn a profit by using the money to launch their own business.
The competition runs for the whole of May (but it's not too late to enter) with prizes awarded in three different age groups – 5 to 11, 11 to 14 and 15 to 19 – in June. There are gongs for the business ventures that net the largest profits but also for outstanding ideas and for projects judged to have had a strong social impact.
The money is a loan and if the venture is unsuccessful, Young Enterprise still expects to get £6 of its money back. But other than a ban on gambling, there are no rules about what sort of business young entrepreneurs may launch. You'll find more details at www.tenner.org.uk.
Small Business-Man of the Week: Tom Barnett, managing director, Switch Concepts
We founded Switch just over three years ago and we've gone from having no turnover at all to revenues that run into eight figures. We've also been entirely self-financing from the start and still have no debt. We have often talked about raising money, but we've always found a way to bootstrap our way through the challenges.
"Switch started out as a very pure internet advertising business, offering direct space to specialist clients in the eco sector – on the Friends of the Earth website, say. But we've evolved into a pioneer of real-time bidding: it's a huge new technology that sells the chance to advertise to an individual visitor to a website to the highest bidder. We sell the engine that enables that process to happen and also take a cut on the sales.
"We've capitalised on the global opportunities and exports now form a large part of our sales.
"In the past, I've tried a number of different business ideas, but none have really amounted to anything. This time I've found the right partners and the right idea at the right time. It's just clicked. My advice is just to keep trying. You've got to love your mistakes because that's how you learn."Reuse content