Ernst and Young have claimed that so-called ‘zombie firms’ are being given too much assistance to keep going, to the detriment of the country.
Experts from the accountancy firm have suggested that the economy in general would benefit if failing businesses were allowed to collapse, as more cash would be available to be recycled to other more profitable firms.
Ernst and Young have suggested that the current business failure rates prove that the measures which have been adopted as a result of the credit crunch, show that too many firms are being constantly sourced with more finance, when in other circumstances they would have gone bust some time ago.
The figures would seem to support the claims; the number of insolvencies being registered are way below what would normally be expected during a recession. And during 2011, the number of companies entering into administration dropped sharply, despite a 42% increase in profit warnings being issued from listed firms.
Analysts from Ernst and Young believe that the surprisingly low level of business failures is due to the leniency many are being shown by lenders, as a result of the current economic climate.
The exact number of businesses currently struggling to stay afloat is not publicly available but insolvency body, R3 studies, have revealed that just under a third of all firms are regularly forced to rely on their overdraft in order to operate. This is generally seen as an indication that the business is in trouble.
The head of global restructuring at the body, Alan Bloom, admitted that many firms which ‘probably should fail, don’t fail,’ an opinion which supports the claims being made by Ernst and Young.