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One in 20 businesses in the North of England – equivalent to 18,000 firms – are struggling to pay their debts when they fall due, according to the latest ‘zombie business’ tracker from R3, the insolvency trade body.

The survey shows a similar number are having to negotiate payment terms with creditors. Although the proportion of business struggling with cashflow problems has fallen by two percentage points since a year ago, the number of ‘zombie businesses’ – those that can only afford interest payments on debts – has remained steady at three per cent, equivalent to around 10,000 businesses.

Jeremy Oddie, North West regional chair of R3, says: “Failing to pay debts when they fall due is a technical definition of insolvency so these businesses are in a perilous position. While they have yet to enter formal insolvency procedures, the day of reckoning may not be too far off. With the economy recovering, it could be crunch time as lenders start to make their minds up about which businesses to continue to support and which to call time on.

“Not all struggling businesses are doomed to failure. The prolonged period of low interest rates and government support schemes has made it hard to distinguish between businesses that are struggling but viable and those that do not have a future.”

R3 says that an orderly ‘wind-down’ of failing businesses is important to avoid the ‘domino effect’. In 2009, R3 research found that over a quarter of corporate insolvencies were caused by another company’s insolvency.

Jeremy Oddie says: “The ‘zombie business’ theory assumes that keeping capital and talent tied up in ultimately unviable businesses crowds out others. However,the long-delayed failure of struggling businesses may cause a short-term jump in unemployment, and could hurt other businesses too.”