Zombies are real. They exist outside the Walking Dead world, lurking right next to businesses you encounter daily. You may not glean their truth by looking at them. But when you probe deeper, their mountains of debt become evident in their pale, uninspired existence close to extinction.
Fortune defines a “zombie company” as one struggling so severely with debt that it could die out at any time. These firms fail to generate enough revenue to pay off even the interest on loans, let alone the full amounts. Recent data reveals that almost 7,000 publicly traded firms fall into this bucket.
While rising inflation and a dampened consumer market play a role, many firms face this fate due to financial mistakes. Here are three behaviors to avoid if you wish to keep your distance from the debt-laden netherworld.
#1 Using Loans to Buy Back Own Stock
Many failing companies tend to take on debt to buy back their stock. They don’t use the funds to invest in innovative technology or hire creative personnel who could make a difference.
In the short term, these repurchases may seem financially sensible. The company can ensure that the packages of top executives remain unaffected. However, when such buybacks start mounting, no one can stop the cash drain from the business.
In these circumstances, the question becomes glaring: Is it worthwhile keeping wealthy shareholders satisfied at the cost of having to lay off thousands of employees? Moreover, uncontrolled buybacks pave the way for bankruptcy.
The pitiable fate of Bed Bath & Beyond is a classic example of this mistake in action. The retailer filed for bankruptcy in 2023. The company spent thousands of dollars in buybacks: almost US$12 billion since 2005. This money could have gone into investments instead of redistributing profits to shareholders.
Two operational words can keep you safe: caution and moderation.
#2 Failing to Consider Alternate Financing
Banks have been the go-to option for business financing for years. Their establishment is so watertight that many entrepreneurs don’t consider other alternatives. However, what happens when your business is on the verge of failing and conventional bank loans become inaccessible?
Reuters reports that Japan is considering a stealth approach toward zombie companies. The government has released measures that require banks to help boost weak companies instead of continually providing loans. This “creative destruction” will mean many companies will be allowed to fail.
Indeed, many financial institutions shy away from supporting entities with poor credit scores. It means you may not get the required support, even if the plan is to turn your business around through hiring or technical assistance.
Further, the process of bank loans may be very long, taking weeks or months from application to approval and availability of funds. The crucial time lost can be dangerous for a struggling business. It can delay essential operations and affect employees’ salaries, brewing a reputational crisis. In these circumstances, sidelining viable alternatives to financing can prove to be an expensive mistake.
For example, firms can consult with a hard money lender to get loans secured by real estate. This approach lets businesses access essential funds based on the value of the collateral, other factors notwithstanding. According to Source Capital, an expert on asset-based lending, this route gets completed within days. It also protects businesses from prepayment penalties or appraisal fees.
The bottom line is that adverse circumstances demand additional caution when seeking funding support. It covers both the source of the funds and the use you will put it to.
#3 Inadequate Planning for Emergencies
A lack of planning is a grave mistake in business – particularly when it has financial ramifications.
In the last few years, our world has suffered unforeseen events like the COVID-19 pandemic, which had immense societal and business repercussions. The European Commission noted that bankruptcy declarations rose throughout 2022. The net total was the highest since 2015 (the year of the first data collection),
Although the world is recovering from the pandemic, many businesses still face a volatile political and economic landscape. Deloitte notes that business growth in the US will depend on the policy changes steered by President Donald Trump.
For example, a wider tariff range can cause inflation to increase again. It can lead to the postponement of rate cuts. Businesses unprepared for new tariffs and spending cuts can expect to land in trouble.
The government’s policies on deportations could also affect agriculture and hospitality – sectors that employ many undocumented workers. The resulting loss of business due to lower productivity and unavailable personnel can trigger situations that demand debt. Treading with caution is paramount.
The modern world may be more comfortable and technologically advanced, but it is also much more stressful. Business leaders must stay updated with the transforming reality of our times and approach it mindfully.
For instance, you may choose to invest in new professionals who can derive data-driven insights. These inputs can grow your business and help you build contingency plans. You could also check hitherto unexplored strategies for accessing funds with more security.
Whatever you do, let’s remember that a lack of financial discretion brings you dangerously close to zombie territory.
