Defining Zombies

Zombie term refers to a company that is unable to grow due to high levels of debt. It continues to operate but is unable to pay off its debt. In simple terms, zombie companies are neither alive nor dead.

Such companies are so much in debt that any cash generated in the business is used to pay off the debt interest. This means there is no capacity for the firm to grow or invest. Zombie companies are also unable to employ more staff.

Zombie companies are also known as ‘zombie stocks’ or ‘living dead’.

The term ‘Zombie companies’ was first spoken in 1990 by Japanese banks during the period of "Lost Decade" 1990s following the bursting of its asset price bubble. The banks continued to support failing companies. The term again became popular after the banking crisis in 2008 when interest rates plunged. Another big hit was during the COVID-19 pandemic when many firms came into the situation of being zombie companies. Governments of most countries introduced policies in support of such firms so that the Economy is stable.

Understanding Zombie Companies

Zombies rely on banks for financing, which is also fundamentally their life support. Therefore, the risk of failure of such firms is higher when the government increases the interest rates. The other threat is when investors withdraw from further financing.

Another risk is when there is a sudden change in the economic environment or business. Companies with strong footholds can make opportunities from economic changes, while zombies may be left behind.

The failure of Zombie companies weakens Economic Growth. Therefore, it is important for governments to introduce policies in support of such companies where they can get low-interest rates from the banks.

Although zombies adversely affect the economy, some companies can play an important role in the contribution to the economy. In this case, such a firm may be bailed out by the government. This saves a large number of employees from job losses, which could have significantly impacted the economy.

How to Keep the Business Alive?

For zombies obtaining new funding from the Bank or existing investors could be difficult at times. However, there are a few alternative financing methods, such as:

• Crowdfunding
• Peer-to-peer finance
• Refinancing your existing assets

Additional Tips to Avoid Zombie Traps!

Reduce the debt

Reducing the debt of the company should be your main goal. A few ways to do this is by selling an asset to raise the Capital to repay a portion of the debt. Alternatively, look for ways to reduce the overall cost of the company.

Refinance the debt

There are different kinds of lenders entering the Market, and some may be Offering cheaper debt options, which can considerably save your interest repayments.