Independent Banking Advisory Service 

Small Business, Small Business wanting to survive recession

Ongoing news in April 2009 shows we are not yet through the worst part of the recession and that many small businesses are failing as banks turn the screws by reducing borrowings, requesting more security, increase their charges or fees and generally exert pressure on small business cash flow. Where the banks hold guarantees for their borrowings the bankers know that provided the guarantor has a property, on which the bank can make demand, the bank can then call on that guarantee for payment. Whilst large banks have been protected by a government 'bail-out' struggling businesses are not getting the same treatment from their bank.

These are extremely dangerous times for small business. Enquiries to IBAS show that, as with the last recession banks are looking after themselves first and targeting business owner's assets for full payment. - April 30th 2009.

The Bank of England's central projection appears to be that the economy will contract and that the bottom of this cycle will be some time around March or April 2009. Their message is to expect a painful recession in 2009. But, their figures also suggest the economy will recover in 2010.

Other economists think the Bank of England is too optimistic. There is also a huge leap of faith in the Bank of England forecasting that recession will be short and sharp. The Bank of England assumes that in a very short period until Christmas 2008 banks will change dramatically from being completely negative, risk averse and profit motivated as they are now, to allowing more lending back into the system.

I don’t think we can assume any such thing from what we are seeing and hearing. In which case the Bank of England prediction is worthless, unless by some miracle both they and the Government can persuade banks to drop LIBOR rates further, which they set themselves but also trust each other enough to lend and borrow.

Put simply the Banks just do not trust each other. There’s very good reason for mistrust. They all know that sub prime problems have created colossal losses and until  losses are all out in the open any confidence in each other is minimal.

See how IBAS has helped small businesses find solutions

The Bank of England’s governor has said the recent crisis in the banking system was "the most severe episode of instability since the outbreak of World War I" – Therefore, none of us can say this is a mere ‘blip’. A few months of even moderate lending will not recover the position that has unfolded world wide since mid 2007. In just over one year values and assets have been eroded world wide.

The UK is not immune from “the most severe episode of instability” Mr King has described but worse still, UK dependence on financial services growth and an industry which has shown complete disregard for consumers, has in our opinion, laid us open for a long recession turning into depression.

Banks and bankers now have a huge fear of further losses. They are in the same mode as during the last recession. They are reluctant to lend to any business or household which they perceive to be potential victims of recession. Last time around that fear itself drove many more businesses to destruction. They might not have failed otherwise.

But it's even worse this time. This time around, banks are fuelled by even greater fears for their own failure and personal loss. Last time this factor was not ‘in the equation’ and banks were arrogant enough to think they were immune from failure.

Banks all round the world are now financially dependent on taxpayers to the value of approx. £5,000bn - they've taken the money but have virtually stopped lending. To pay back government requires greater control over losses than ever before. To pay back government quickly, means that more profits must be wrung out of all of us, but without any more risk. Therefore lending more is not top of any banker’s agenda - nor will it be.

The inherent difficulty is that government rhetoric and banker’s logic can never join together. Not that they ever did. PR from both sides, plenty of Hype but substance is still not evident. UK Businesses are already in trouble and banks are cutting back lending to businesses they perceive most vulnerable. In banker’s logic that’s now a large section of the small business sector. In fact any business borrowing from a bank, particularly those who recently borrowed to expand their business, or in covering expansion costs, are most at risk.

A large number of the business failures quoted so far, will inevitably include businesses that were not succeeding despite being lent considerable funds. There will be a large number of construction companies and large numbers of buy to let operators, caught between a rock and a hard place as house values dropped, mortgages dried up and repossessions increased.

It’s been quoted this week that 43 businesses a day are collapsing with many blaming their problems on ruthless treatment by the banks. As small firms employ around 60% of the country’s private sector work force it’s affecting jobs immediately in the ‘build up’ to Christmas. The Christmas/New Year holiday period is a notorious ‘hot spot’ for business failures, as cash flow is stretched to breaking point when a business is already showing symptoms of failure. Big businesses have accountants and advisers. Small businesses with limited resources often lack such professional help and advice.

IBAS ‘bridges’ the 'gap' in expertise and experience for your business by providing a ‘tailored’ business membership and business resource directly for your business. We provide the missing elements and experienced business expertise for your small business - email us for help.

IBAS helped many businesses survive in the last recession and has helped many since. What is the future? What will 2009 bring? We would say that  strong businesses can survive and others can also grow stronger during the recession. There is no doubt that innovation will drive companies forward. The businesses which can reinvent themselves will survive and prosper. However, Businesses will need to make sure they control their business in all areas. Business mistakes impact on cash flow and on profits. In good times mistakes can be overcome relatively easily but in periods of recession even relatively small mistakes can shut a business down.

In the short term, borrowing from banks will be impossible for some. For others it will no longer be acceptable to borrow, because of the risk involved for the business. Why? Because banks seek ever greater security and control over businesses now looking for funding by using tighter agreements, more security and debentures. Generating and keeping hold of cash will be the number one priority for many businesses in the next twelve months.

Eddy Weatherill - chief executive IBAS - 13^th November 2008

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