The UK’s borrowing costs are higher than the government would like them to be. Economic growth remains weak, and public finances are under constant pressure.
All of this make things difficult for pretty much everybody. But one particularly vulnerable group are the small businesses which survive mainly through continued borrowing.
Known as “zombie” firms, these are companies with persistently weak profitability which struggle to generate enough income to cover their debt costs over long periods of time.
Recent evidence suggests that the pressures on these companies are becoming more acute. Around one in six medium sized businesses in the UK is thought to be at risk of becoming a zombie firm.
And some sectors are more vulnerable than others. Businesses operating in leisure and hospitality, for example, often need substantial amounts of external finance to support tight margins, leaving them particularly exposed when borrowing costs rise.
But the worry is not simply that borrowing has become more expensive. It is that a combination of higher refinancing costs, weaker growth and geopolitical shocks could really damage firms that were already financially vulnerable.
The current pressure on firms is coming from several directions. One is the sharp increase in long-term borrowing costs across the UK economy.
In May 2026, the cost of borrowing for the UK government rose to its highest level in almost three decades after bond markets reacted to worsening tensions in the Middle East and the possibility of renewed inflationary pressure. Borrowing then tends to become more expensive for businesses as well.
But not all companies are affected equally. Large firms with strong balance sheets (like a bank or a big pharmaceutical firm) may be able to absorb higher financing costs relatively easily. Companies already carrying high debt and weak profitability are much more exposed.
Many firms borrowed heavily during the long period of exceptionally low interest rates that followed both the global financial crisis of 2008 and COVID. As those loans now mature, refinancing them becomes significantly more expensive. For some businesses, that shift may prove difficult to manage.
Zombie apocalypse now?
The rise in UK borrowing costs is closely tied to geopolitical developments. Escalating tensions in the Middle East have increased fears of disruptions to energy supplies and shipping routes, particularly around the Strait of Hormuz and the Red Sea. Higher oil prices can feed quickly into inflation through fuel, transport and production costs.
Businesses that were already struggling with narrow profit margins may now face a devastating combination of higher refinancing costs, rising energy and transport bills, as well as weaker consumer demand and tighter lending conditions.
On their own, any one of these pressures might be manageable. Together however, they create the kind of environment in which financially fragile firms can quickly come under strain.
Smaller businesses are likely to face the greatest pressure because they depend heavily on bank lending and often operate with limited financial buffers.
Unlike large corporations, many small and medium-sized enterprises cannot easily raise money through financial markets. Their survival is closely tied to bank lending conditions and day-to-day cash flow.
But British banks may become more cautious as economic uncertainty rises. If lenders become less willing to refinance weaker companies, some firms that survived during the era of cheap credit could struggle to continue operating.
There is also evidence which suggests that prolonged periods of cheap borrowing can allow financially weak firms to survive longer than they otherwise would have. Some economists argue that this can reduce productivity by trapping labour and capital in inefficient businesses.
The current environment may therefore become a test of which firms remain viable once borrowing costs stay higher. The recent surge in UK borrowing costs is often discussed as a problem for government finances. But it may also signal something broader about the post-crisis economic model that dominated much of the past decade.
For years, exceptionally low borrowing costs helped support companies through periods of economic stress. Now that financing conditions are tightening again and geopolitical uncertainty is rising, some firms may find that survival becomes much harder.
That does not necessarily mean a sudden wave of collapses is imminent. Many businesses remain fundamentally healthy.
But the combination of higher refinancing costs and external shocks could increasingly expose firms whose survival depended on the unusually cheap borrowing conditions of the past decade. If that happens, the demise of zombie firms may start to become a much more visible feature of the UK economy.
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