Businesses across the UK are being warned that more so-called “zombie” companies could collapse in 2026, increasing unemployment and putting financially healthy firms at risk if they are left unpaid.

Experts say rising costs, high interest rates and delayed payments are creating what has been described as a “cashflow contagion”, where the failure of one business can quickly spread to others.

Zombie companies are typically defined as firms that are still trading but generate insufficient profits to cope with higher operating costs.

A combination of elevated interest rates, expensive energy and rising minimum wages as key pressures facing weaker businesses, analysis from the Resolution Foundation highlights.

The think tank said this environment could lead to a turning point where less productive firms fall away.

It warned, however, that the short-term consequences are likely to include job losses and disruption.

Unemployment stood at 5.1 per cent in October 2025.

Business confidence has remained fragile, with many firms reluctant to recruit and cutting back on investment.

Ruth Curtice, chief executive at the Resolution Foundation, told Newspage: “There are early and encouraging signs of a mild zombie apocalypse, where higher interest rates and minimum wages have combined to kill off struggling firms and leave the door open for new, more productive ones to replace them.”

She said: “But while this is good news for our medium-term economic prospects, the short-term impact could be job displacement and higher unemployment.”

Ms Curtice said policymakers would need to intensify efforts to address the risks to workers.

Small businesses say the warning signs are already visible in their finances.

Debbie Porter, managing director at Bakewell-based Destination Digital Marketing, said her company’s aged debtor report shows a sharp deterioration in payment behaviour.

She said: “My aged debtor report in my accounting software tells you all you need to know about the state of the economy right now.

“Last financial year the average debtor days report was at 37 days, and this financial year it is 168 days, an increase of almost 350 per cent.”

She said rising wage costs and associated employer contributions are placing additional strain on small firms.

Ms Porter said increases linked to higher minimum wages, national insurance and pension contributions have added pressure that many businesses cannot absorb.

“If the Government’s strategy is to have a clear-out of zombie businesses, then that strategy is working.”

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Kate Underwood, founder at Southampton-based Kate Underwood HR and Training, warned that struggling firms can destabilise otherwise viable businesses.

She said: “Zombie firms won’t just die quietly.”

The delayed payments often escalate gradually before becoming critical, as businesses may continue supplying customers who are already in financial trouble.

She warned that redundancy decisions made under pressure can expose firms to legal risk, and that businesses should closely monitor payment patterns among key customers and suppliers.

Ms Underwood said tightening payment terms and acting early could reduce exposure to bad debt.

Marc Smith, owner at Tamworth-based Smith & Ellis Butchers, said one of his two retail businesses is now operating in what he described as “zombie” territory.

He said rising costs have eroded profitability despite efforts to remain competitive.

Mr Smith said: “What is pushing us towards the edge are energy bills that are simply too high.”

He said wage growth, national insurance and pension contributions have risen faster than prices can be increased, and support with energy costs or national insurance relief could help small retailers survive.

Without intervention, he said further closures are likely.

Concerns have also been raised about how struggling businesses may turn to automation as a cost-saving measure.

Colette Mason, author and AI consultant at London-based Clever Clogs AI, said poorly implemented automation could accelerate company failures.

“Zombie companies will be finished off by desperate automation and the fines that follow.”

Ms Mason warned that rushed adoption of artificial intelligence can lead to data protection breaches and regulatory action.

Fines and enforcement action could finish off firms already under financial strain.

Colin Crooks MBE, chief executive at Intentionality, said small businesses need to take a firmer stance on payments.

He said: “Stop being polite about cashflow.”

Mr Crooks said businesses should embed payment terms into contracts from the outset, and that deposits, progress payments and direct debits can reduce risk.

Firms that allow extended payment terms without scrutiny are exposing themselves to unnecessary danger.

“With more collapses forecast for 2026 and unemployment at 5.1 per cent, this isn’t paranoia, it’s survival.”

He said businesses that protect their cashflow are more likely to withstand further economic shocks.