The COVID-19 pandemic has made creditors tighten their wallets, only giving loans to businesses that are in good financial standing, have maintained solid revenue streams, and unlikely to go bust. If creditors do offer loans to these zombie companies, it is usually at a high-interest rate. This high-interest rate reflects the risk the creditor is taking by loaning their cash to the zombie company.
Often times, zombie companies are also businesses that encounter decreased revenues in a time of economic distress. This makes it harder for them to generate the capital needed to continue paying the interest payments keeping them afloat. Between losing access to affordable capital, and declining revenues, zombie companies begin to collapse in poor economic environments.
An obstacle to economic growth
Zombie companies are often seen as an obstacle to economic growth. Their inability to grow detracts from overall productivity. Economists argue zombies eat up market share and keep talent from successfully operating companies. Without the cash needed to invest and grow, zombie companies are inefficient and uncompetitive, lowering productivity in the global economy.
