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March of the zombies – businesses at risk from interest rate hike

More than 5,000 companies in the Black Country and Staffordshire are classed as a 'zombie' firms - meaning they are barely breaking even and are avoiding insolvency courtesy of low interest rates - new figures have revealed.

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Out of 8,966 companies registered in Wolverhampton, a total of 1,330 have been classified in the state by business rescue and recovery specialist Begbies Traynor.

One in seven Dudley firms is classed as a zombie; 436 of the 3,349 companies in the town. In Walsall, the count is 1 in 11 – 583 out of the 6,264 registered businesses – while in West Bromwich it is one in 10, or 131 of the town's 1,281 companies.

And in Staffordshire one in 11 firms are zombie companies, accounting for 3,018 of the 34,703 companies registered in the county.

Now, with interest rates expected to rise in the New Year, it is feared it could push many zombie firms off the cliff into collapse.

John Kelly, regional managing partner for Begbies Traynor in the Midlands, said: "The historic low interest rates that UK consumers have enjoyed over the past few years are also providing a lifeline to tens of thousands of businesses in the Midlands.

"However, some economists have commented that there is a danger that maintaining this situation is merely storing up problems for the future, particularly as the negative equity of zombie firms nationally is estimated to be in the region of £70 billion.

"The problem is that if rates do not increase soon the number of zombie companies will. That means when rates do rise the number of failings is likely to be higher and if not carefully managed could threaten what is still a delicate recovery."

In Wolverhampton the zombie ratio has altered little since 2010, when around 13 per cent of firms were classified as zombies.

During that year, there were 7,856 businesses operating in the city, with 1,097 reliant on credit.

A zombie business is a zero growth business that is surviving, primarily due to low interest rates with some benefitting from HMRC's 'time to pay' arrangements for outstanding tax payments.

Several high profile economists have raised concerns regarding the impact that these zombie businesses are having on UK productivity, and the diversion of funding away from growth businesses.

Nationally, it is estimated that there are in excess of 400,000 zombie firms, according to Begbies Traynor.

Begbies Traynor's John Kelly said pressure to raise UK interest rates was growing. "Following much discussion, the US Federal Reserve has finally raised interest rates by 0.25 per cent – the first increase in almost a decade. This is a sign that they are confident about the sustainability of their economic recovery.

"Whilst the recession this time around has defied many conventions, we do tend to follow the US in many areas, economy included. So I wouldn't be surprised if we begin to see growing calls within the Bank of England's MPC to raise rates in the coming months."

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