Nigel Birney, Head of Trade Credit, Belfast, Lockton Companies LLP
As we bid farewell to 2021, the Omicron variant and its potential impact on the economy has heightened anxieties among the business community. Talk of lockdowns or new restrictions dent confidence, lead to uncertainty, and drive customers away, as can be seen with the recent complaints of the hospitality sector. While the wider economy is forecast to bounce back considerably next year, many businesses are still in a perilous position as we enter 2022.
Publishing their latest financial figures in December, leading insolvency specialists, Begbies Traynor, warned that the UK could be in for a wave of new insolvencies in the new year. In their words, they are “waiting for reality” to return. While the speculation over lockdowns and harsher social distancing rules may raise expectations that comprehensive state financial supports will also be reintroduced, the reality is that, for many distressed firms, this will simply prolong the inevitable.
Zombie companies are defined as firms which earn just enough money to continue operating and service debt but are unable to pay off their debts. Zombies are often reliant on banks or independent financiers. Or, as has been the case for nearly two years now, government support. Corporate insolvencies have been historically low during the last 12 months due to the additional liquidity provided by the UK Government, relaxed insolvency laws, and heightened goodwill between companies. However, all three of these are unsustainable in the long term.
Data shows that the number of businesses in Northern Ireland in a state of “advanced financial distress” has doubled over the past year, reaching over 8,000 local businesses. Thanks in large part to both Brexit and the pandemic, zombie companies are now unfortunately on the rise here. The sheer amount of state aid since March 2020 has kept many businesses on life support. And with the cost of everything from materials to fuel rising weekly, more and more businesses are likely to be affected.
Robust credit management strategies incorporating trade credit insurance can protect your business from suffering a bad debt caused by the failure of zombie company. Trade credit insurance can also unlock export potential around the world as underwriters are able to provide a comprehensive insight into the constantly changing risk environment to ensure that you can trade with confidence both at home and abroad.
The Independent Fiscal Commission for Northern Ireland published its first interim report recently. Among its analysis of what the devolution of different financial levers and tax powers could mean for the public purse here, the most striking takeaway of the report was its grim reading of the state of our local economy. It states that our income per capita is 25% lower than in other parts of the UK, while our public spending is 20% higher.
The Northern Irish economy is primitive and underdeveloped in many ways, reliant on public spending and somewhat deprived compared to our neighbours in Britain and the Republic of Ireland. Having strong credit risk management measures in place to defend against the weaknesses in our economy will be as important as new ways of doing business as we emerge from the pandemic. Trade credit insurance is one way of giving you that peace of mind as you trade with other businesses and can provide the safety net you need to grow and expand securely.