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Wednesday, November 26, 2008
Often it is not the need to throw new money at the situation, but to simply secure what is already there. If bankers and other lenders are taking a fresh look at their portfolios and their definition of risk, then there is a real chance that they may withdraw or reduce facilities that were "OK" only a few months ago.
One reason why this might occur is lack of collateral or security (I accept there may be others!). If funding is supported by certain assets these may now be worth less than they were or are considered more risky.
What is surely needed then is Government intervention to provide the support in providing some sort of guarantee to give the lender the comfort they are looking for? Well, it would appear that perhaps that is coming ... but we cannot be sure! In the Pre-Budget Report Alistair Darling announced a "Small Business Finance Scheme" - a temporary guarantee scheme of up to £1 billion to be introduced early in 2009. Problem is, unless I am going blind, I cannot find any further information about this anywhere!
I hope that it is not just an extension of the Small Firms Loan Guarantee Scheme (SFLGS) which really does not work too well and certainly will not solve the issues businesses are likely to face in the coming months. For starters it must cover existing lending!
If anyone can shed some more light on this I would be very interested to hear about it!
The Governments’ own press notices make it clear that they believe this measure will stimulate the economy and consumer spending. As the impact of the first change in the standard VAT rate since 1991 sinks in, it is becoming increasingly apparent that this will not necessary have that effect. In fact what it is much more likely to do is increase margins within businesses and not be passed on to the consumer.
The reason is clear, and it is in fact quite staggering that this was not seen by those making these fundamental decisions! Most retail and consumer spending is displayed inclusive of VAT, often creating “nice” numbers like £5 and £4.95. Nobody in their right mind is going to spend a huge amount of time amending these prices by what is a very small amount to create strange looking numbers (£4.89 and £4.84 in my examples) only then to have to do it all again on 1st January 2010 when the VAT rate returns to 17.5%.
Having talked with clients and other companies over the past couple of days most B2C businesses find themselves in this position and are not likely therefore to change prices – so the consumer gets no benefit. The issue is made even worse by businesses (including ours) that receive monthly standing order payments. One client has 200 a month coming in! Again, no one is going to change any of these …the admin would be ridiculous for no real benefit.
The other interesting side effect that was highlighted on one forum I read was the impact on cash flow in businesses. All VAT registered businesses that are normally in a net VAT payment position will gain a VAT cash flow advantage though their VAT quarter, as they in effect collect VAT on behalf of HMRC before they pay it over. The reduction in the VAT rate will in effect reduce this! Interesting. OK, you can argue that this money does not belong to the business in the first place, but the reality is many (if not most) businesses use this cash flow they don’t hide it away somewhere!!
So it would appear that Mr. Darling has got it badly wrong. All he seems to have achieved is creating a lot of work, a lot of confusion and ill feeling!
However, considering the practicalities …if you are concerned about how this impacts you or your business, or what you need to do to comply, give us a call 0800 180 4265 and I am sure we can help you.
Monday, November 10, 2008
As has been widely predicted there has been a dramatic rise in business insolvencies in the period. Liquidations increased by 10.5% over the previous quarter, and 26.3% over the same quarter last year to stand at 4,001. The movements in Administrations, 50.7% up on last year, Receiverships 237.5% up and Company Voluntary Arrangements (“CVA”) 29.5% also all tell their story. These last three mechanisms are often seen as potential recovery or rescue methods (particularly CVA’s and sometimes Administrations, much less so Receiverships) so there may be some hope that these figures indicate that at least some businesses are being saved.
However, the reality is that these statistics are probably just the thin edge of the problem ..and we will continue to see further dramatic rises in the quarters ahead.
Let us not also forget the huge rises in personal insolvencies that have been seen in the past couple of years (Bankruptcies and Individual Voluntary Arrangements), which are again predicted to reach new record levels this year. This position could become much worse if small business start failing at an increasing rate as this will then lead to increased unemployment and the consequences on personal finances.
Over 95% of all UK businesses employ 10 or less people … and it is those very businesses which are now increasingly vulnerable.
Not only are there very many fragile businesses which will easily fall, there are also many business leaders who have never operated their businesses through a downturn – let alone one that is likely to be as dramatic as this one. Many are fair weather sailors. They need to quickly learn new skills and run their businesses quite differently in the months ahead if they are not going to become one of next years insolvency statistics!
Thursday, November 06, 2008
What is more, those who should be in the know are suggesting it will go lower still, maybe to around 2%!
Now it is up to the banks to pass on the benefits .... something which has not been happening up until now. In fact we have seen attempts by the banks and asset based lenders to increase margins recently because of the high rates in the wholesale markets.
It is all a huge shift in a very short space of time. Early in the summer some were suggesting rates were going to go up to deal with inflationary pressures! Now it seems the general wisdom is that inflation will fall. You have to be quick on your feet these days to keep up with this!!
Turning to other related numbers ...the rise in small business failures. A recent poll of its members by insolvency trade body R3 showed that they believe failure rates will increase by 41% over 2007 levels in 2009 to reach levels last seen in the early 90's. In addition a recent report in The Telegraph discussed recent aggressive tactics from banks resulting in a 152% increase in receiverships in the last quarter! Receiverships have fallen dramatically since the Enterprise Act of 2002 as banks were prevented from putting the power into new lending, instead using the Administration process. However, it seems where they can the Receivership process has found more favour again as it gives banks more control over their ability to collect out their debt. Worrying trends.
What is the advice to smaller businesses? Well the cost of borrowing may be coming down (quite dramatically), but it is clear that the banks are being very cautious and monitoring their lending books very closely. Make sure you stay close to your bank relationship manager and keep him well informed about your business to give him the reassurance he needs. Then focus on cash generation above all else ...it is the only way you are likely to get cash into your business for the foreseeable future - generate your own!!
Interesting times ....