There has been much commentary recently on the treatment by lenders of individuals and small and medium sized enterprises (SMEs).  Indeed, the FCA has made its expectations very clear – that lenders should fully support those experiencing financial difficulty.

As a restructuring professional and insolvency practitioner, and a former regulator, I have some competing views and thoughts on what this means and whether it is the optimum approach in the longer term.

I am of course fully supportive of an environment where all customers are treated fairly, and where there are opportunities to provide forbearance or payment holidays this should be encouraged.  However, and this is where hard truths cannot be ignored and tough decisions need to be made, providing forbearance or granting payment holidays for some businesses may actually cause more harm than good.

There are many businesses that fall into the ‘zombie company’ definition – in that they earn just enough money to continue operating and service debt, but are unable to pay off their debt.  These zombies scrape by, meeting overheads but they have no excess capital to invest to spur growth or to innovate.  Typically a zombie company is already subject to high borrowing costs and is dependent on a lender for financing; effectively it acts as the life support.

As SMEs start to feel the impact of higher inflation and increasing interest rates, it’s time for the zombies to wake up, seek advice, consider options and take appropriate action.  Zombie companies have benefited from an extended period of low interest rates and, in many cases, a temporary lifeline of government support in the form of bounce back loans, CBILs and HMRC time-to-pay arrangements.  Add to this the pressure, directly or indirectly, on lenders not to enforce on their security.  This has resulted in pockets of the economy becoming a potential medium to longer term burden on society with taxpayers footing the bill and lenders being dis-incentivised to lend to SMEs or only lending at higher borrowing rates.

There’s also the knock-on impact on the lenders which have their margins eroded and/or their security put at risk if zombies are allowed to sleepwalk through the current economic crisis.

Whilst I am not suggesting lenders should take a knee-jerk response to struggling SMEs, it’s important that companies can make positive contributions to the economy through economic growth, effective use of capital, enhanced productivity and innovation.  An independent review of a business, stress-testing its short to medium term viability and considering appropriate restructuring options, may actually lead to outcomes which add greater value to the wider economy.

Fair treatment of SMEs in financial distress should be a given, but forbearance or payment holidays should be considered on a case-by-case basis with a longer-term view to value creation and profitability.  It may be time, perhaps forcibly in some cases, to wake the zombies from their slumber.