The insolvency and restructuring trade body says the proportion of UK companies which are only paying the interest on their debts dropped to 3% in December from 5% in April, and is now the lowest it has been since R3 began tracking zombie businesses in June 2012.

It had reached as high at 9% in November 2012 and August 2014, and stood at 8% in September 2016.

R3’s research, based on interviews with 500 nationally representative businesses, also found that other signs of acute distress have dropped to record or near-record lows.

Just 1% of UK companies report they are having to negotiate payment terms with creditors, are unable to repay debts if there was a small increase in interest rates, or are struggling to pay debts when they fall due.

Duncan Swift, deputy vice-president of R3, said: ‘The fall in businesses only paying the interest on debts comes despite the first rise in UK interest rates in a decade. Instead, it may be that November’s modest rate rise concentrated directors’ minds and, with the prospect of further rises in the near future, may have prompted businesses to deleverage or refinance now to avoid future pain.

‘With the growth of alternative lending providers over the past five years, including peer-to-peer lending and growing private equity interest in distressed businesses, it has become easier for struggling businesses to move out of immediate financial danger.’

However, Swift warned that those businesses which have refinanced may not be any more productive and may have put problems off for a later date, while a serious financial downturn could easily create a new group of zombie businesses.

R3’s December research also saw other signs of business distress fall back from a recent upward trend. The proportion reporting at least one of five problems (decreased profits, reduction in sales volumes, regular use of maximum overdraft, recent fall in market share, making redundancies) now stands at 16%, significantly lower than the 25% who reported difficulties in September 2017.

Despite this, the research also found that levels of business growth remain flat and well below record highs. Just 55% of UK businesses report at least one sign of growth (increased sales volumes, increased profits, investing in new equipment, market share growth, business expansion) compared to the high of 69% seen in December 2015 and June 2016.

Businesses’ economic pessimism is also continuing to rise with 27% of businesses now more pessimistic than they were three months ago – the highest this figure has been March 2013. Likewise, 9% of businesses expect their activity to decrease in the next year, the highest this has been since December 2011.

Swift said: ‘The improvement in distress levels is welcome, but with growth subdued and rising pessimism, it’s not clear how long this improvement might last.’

Report by Pat Sweet