One in six North West companies is just paying the interest on its debts, rather than repaying the debt itself, according to new research from the insolvency and restructuring trade body R3.

Its latest Business Distress Index also found that 18 per cent of North West companies are struggling to pay their debts when they fall due; 21 per cent are having to negotiate payment terms with creditors; and five per cent say they would be unable to repay their debts if interest rates were to increase by a small amount.

Paul Barber, North West chair of R3 and a partner at Begbies Traynor, says: “With tougher trading conditions and much uncertainty over the future, thousands of North West businesses find themselves stuck in ‘zombie’ mode.

“These businesses are capable of ticking along, but growth and productivity improvements are out of their reach for the time being.

"Zombie businesses will struggle to deal with external shocks, which presents a problem if they all were to become insolvent at the same time, and they also tie up investment and staff which could be used more productively elsewhere in the economy.”

R3 members have also reported that some businesses are building up stock to safeguard against risks such as a hard Brexit.

“Stockpiling puts pressure on cashflow and investment in other areas, and large stockpiles also take time to turn back into cash and are at risk of obsolescence,” adds Paul Barber.

“The future for these zombie businesses is mixed. Some might eventually be able to restructure or find new investment, and grow. Others will run out of road and become insolvent. While this would mean capital could be ‘recycled’, it may also be a bit of an economic shock in itself.

"With uncertainty coming at them from different directions, businesses need to stay on their toes. Any business can be blindsided by a sudden change in its operating environment; longer-term and more gradual changes must also be monitored carefully to avoid the risk of stagnation. In a distress scenario, the perspective of a qualified third-party advisor can be invaluable for helping directors determine the best way forward.”

R3’s research was based on a survey of 1,200 companies.