Bank lending to SME's during the crisis

Two recent personal experiences that illustrate the continuing difficulties experienced by small businesses.

I am a trustee of a charity that has a trading operation and (informally) asked its bank manager for an increase in its overdraft to cover the normal trading ups and downs. The important points to note are these; the business has traded for twenty five years, during which profitability has ranged between 5% and 10% of turnover; the increase asked for was from 1.5% of turnover to 3 % of turnover. So the request was for a modest increase. The response was a 'no', delivered in terms that suggest the bank is simply not lending to small charities and, by extension, to small businesses. The message, "you have to manage on your own".

We have a friend who is Finance Director of a large private construction company in Italy. We all know from the news that Italy is experiencing significant economic issues but trade has not stopped: we are not talking about economic meltdown, only about long-term funding issues. By their nature, construction companies need external financing because they get paid only after they complete large scale works and, even then, there are retentions to the end of the contract. So finance is critical but, nonetheless, it is a surprise to find that our friend spends virtually all his time dealing with the banks.

My conclusion: bank protestations that they are lending 'as usual' to small businesses are not true. Their figures that purport to show that small businesses are not asking for funds are bogus because the applicants are headed off before they can make a formal request. The lessons...be assertive, shop around, rigorously and frequently reforecast your cash requirements and produce the very best business plans you can.

and insolvencies will keep rising...

Cork Gully, the insolvency experts, have brought out a report (see link here) that forecasts increasing numbers of company insolvencies in 2012 and 2013 before they begin to fall back in 2014.The only good news from these figures is their expectation that the numbers will not be as bad as 2009, peaking some 7% lower.

Insolvency and Financial Distress - My new book

This is my new book. And it is all described in the name, it deals with avoiding and getting out of problems rather than focusing on the legal technicalities. Of course there has to be some discussion of the different types of insolvency proceeding because this sets out your options, so there is some legal stuff; but I hope that is readable for anyone. If you plan to use insolvency proceedings or if you have no choice then you will need professional advice - this book will guide you towards understanding what your legal options but do not rely on it for legal advice. The law is complex and changing all the time, a tiny difference in circumstances can make all the difference to what you should or can do.

Concentrate on avoiding trouble.

The first thing is to recognise you have a problem. I set out in the book the signs you should not ignore. Are you constantly juggling payments to your creditors, delaying them and choosing which one to pay today? Has this been going on for long?

I have been there. I am a qualified accountant who held senior management positions in big businesses before co-founding a business that we believed would make us rich. It traded for more than 13 years. Towards the end of that time it appeared to have discovered a route to real success before rapidly changing markets, management disagreements and rising lease costs led us into difficulties. I have spent time preparing daily cash forecasts and deciding who to pay, in which order and how to delay some. I have watched the overdraft anxiously as it got close to the limit and we never had surplus cash in the bank. If this sounds familiar and goes on for long then you have a problem too.

There are ways to address these problems. It does not have to be a slippery slope to oblivion. You start by recognising there is a problem and then you address that. You don't spend all your time dealing with the symptoms of the cold - because soon you will find it has turned into pneumonia - you deal with the causes first. If you have management disagreement then sort that out. If you can't, then leave and do something else. If you keep fighting old battles then things will just get worse. If you have a broad agreement then agree the business strategy that will deal with the problems and exploit the opportunities. There are always opportunities.

If the strategy makes sense then there are usually ways to raise cash to deal with short term problems. But if the banks and investors see long-term problems then they will fight to be first to pull the plug and get their money back.