COVID-19 cash crisis could create ‘Zombie companies,’ warns Resolution Foundation

A UK think tank report highlighted a cash and confidence crisis affecting small businesses, especially in the hospitality and service sectors.

Despite an overall rise in company cash holdings, the Resolution Foundation’s analysis showed a sharp increase in small firms reporting less than three months of cash reserves.

With no sign of lockdown restrictions being lifted soon, Resolution Foundation recommended continuing government support, but said direct loans should stop to avoid heavy debts.

Crucially, companies without sizeable cash reserves are unlikely to invest in new stores or staff, so the effects of COVID-19 on firm’s reserves could extend the recession.

Some small and medium-sized companies might not be able to survive the downturn at all.

The think tank said, “Where they have left firms overindebted, this will discourage investment and hiring, creating a new class of ‘Zombie firms’ that operate to service their debts, rather than expand and grow.”

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