In Credit

It is no surprise that small and medium sized businesses have been the worst hit by the credit squeeze since the financial crisis kicked off. It's only too easy to recall top headlines announcing that five major bank lenders in the UK would support the Government's £76 billion pledge to get credit flowing to businesses.

Bank of England figures revealed yesterday report that British banks have missed their lending target by £1 billion. This has certainly set the twitter sphere alight. Barclays, HSBC, Lloyds Banking Group and Santander UK publicly said they met their individual targets but RBS, which is 82% owned by the taxpayer, missed its share. On top of that, Osborne approved a £500m bonus pot for RBS despite it missing lending targets.

Some may argue that this shows that Project Merlin and other measures have not helped as much as expected. However, the numbers could also be interpreted to show that banks are actually committed to lending as they came close to the targets set.  The problem may be that SMEs are not entirely happy with the terms and conditions banks set. This is particularly frustrating when banks have exceeded their overall gross lending target of £190 billion by nearly £25 billion. Data also shows that only 7.8 per cent of government contracts were awarded to SMEs during the end of last year, rather than the promised 25 per cent. What does this mean for SMEs?

A recent NatWest survey found that in reality some SMEs, particularly those in Wales, are less optimistic than the UK average on prospects for the rest of the year. They do not rank access to finance as a main priority. Instead, they would rather concentrate on keeping their businesses going by identifying new customers and markets.

In reality, this may be the cause of the problem. It suggests that there is still a lot to be done to restore confidence and make SMEs realise that funding is available and that this is an important way of boosting expansion and growth prospects. The Government must move away from meeting numbers to instead implementing initiatives which focus on credit easing. As the shadow Treasury minister, Chris Leslie MP rightly said banks also "need to acknowledge they have been spending more time securing their own balance sheets than helping growth and employment in small firms."

When push really comes to shove, the focus of government activity needs to be on action, not just numbers. Small firms need support not just highly publicised initiatives if they are to be set on a path back to sustainable growth. Businesses also need to bear in mind that it takes time to build a good credit history and so even if they do not have an immediate need to access finance; it's never too early to start building up your credit rating.  Useful tips for SMEs and newly incorporated businesses can be found here http://bit.ly/x9WxnG

Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy. Or, in High Street vernacular, when the hordes go down the boards go up. That's the prediction in new research from The Local Data Company (LDC) who say UK High Street vacancy rates will increase in 2012 because of weak consumer confidence, rising unemployment and growing online sales.

We need only examine our own shopping habits to see how we're contributing to the High Street demise. From the North East's Metrocentre to the South East's Bluewater, millions have swapped the congested town centre for a free parking out-of-town shopping experience. Even more of us have deserted the High Street to buy books, music, films and holidays online. LDC report that out-of-town and online together now accounts for more 40% the share of shopping.

Given these rises, it is perhaps a surprise to learn that at 14.3%, the vacancy rates actually stabilised in 2011. How so? The implosion of electrical, household and confectionery stores has been overtaken by the explosion in mobile phone, charity and convenience stores. At what price? LDCs research showed that 10,000 town centre shops closed in the past two years, with 183 retail chains calling in the administrators, 11% up on 2010.

What can save the High Street? On Saturday, the government said that 12 run-down High Streets in England could compete for a £1m prize as part of plans proposed by their retail queen Mary Portas. Local government minister Grant Shapps described the scheme as a 'golden ticket' and added that as part of the contest areas would bid for support from a dedicated team and Ms Portas.

Predictably, there is already opposition to Ms Portas ideas with Phil Wrigley, Majestic Wines chairman, urging the government to relax planning laws and convert struggling town centres into affordable housing, comparing the situation of many shopping thoroughfares to the decline of the shipbuilding industry. The government will publish its response to Ms Portas proposals in the near future and it will be interesting to see how 'inclusive' this is. Peter Box of the Local Government Association is concerned that councils could be overlooked and says: "We urge Mary Portas to enter discussions with councils on how they can boost local High Streets."

In the meantime, trade suppliers will need to take heed, monitor their retail buyers, seek payment to terms, and protect their margins. Challenging it is. Impossible it is not.

(CT)

Here's a question to start the week with. What do the British Printing Industries Federation, the Federation of Master Builders, the National Pig Association and the British Home Enhancement Trade Association have in common?  On the face of it probably "not a lot". But before you risk spending the entirety of this Monday morning trying to guess the answer, allow me to put you out of your misery.

And joking apart, the answer actually relates to a deadly serious business issue, as all these organisations recently confirmed themselves as signatories to a letter delivered by the Forum of Private Business to Mark Prisk MP, the Minister for Business & Enterprise, demanding more Government action to address the problems posed to UK firms by the late payment of trade invoices.

Let's be clear, late payment is a corrosive trend which can drive companies out of business. Statistics reporting the woes of company owners who cite it as the major drain on their cashflow are plentiful and many companies (with large corporates including supermarkets often being the guiltiest parties) seem to think it perfectly normal and acceptable to fail to pay suppliers on time or in full, as well as change their payment terms unilaterally, without bothering to consult with their suppliers.

All of which is great for company bean counters who get to sit on interest-earning cash for longer but bad news for suppliers who need to meet their own financial commitments, including paying their own suppliers as well as meeting wages and general business overhead commitments.  It is worrying that 20 per cent of UK credit managers polled in a recent Graydon UK survey believed late payment could threaten their company's ability to trade during 2012.

But what of the existing legislation I hear you cry? The Late Payment of Commercial Debts (Interest) Act 1998, updated in 2002, is grandly titled and well-intentioned but in practice it's utterly ineffective. When it comes to the crunch, small firms are reluctant to speak out against large companies for fear of order cancelling reprisals. The regulatory framework needs tightening and the measures suggested by the Forum of Private Business and their partners (including Graydon UK), including the requirement of FTSE companies to report more detailed information on their payment times, and a clamp down on those firms taking 'prompt payment discounts' and imposing retrospective changes to payment terms are crucial to redressing the balance.

The Government seems willing to help. The BIS Finance Fitness campaign is a good thing. And today that same department is working to raise the media profile of the importance of paying on time. It's great to see but this momentum needs to be sustained. Companies like ours are working hard to counsel clients on unlocking growth opportunities by identifying and engaging new trading partners. Our job will be easier in this respect if the payment playing field is driven by fair play.

(ws)

It's impossible these days to navigate the newspaper business pages without the word 'transparency' appearing in what feels like every other paragraph. Indeed, this tautological mantra seems to have become a catch-all solution for everything from reining in executive bonuses to mitigating the risk of corporate fraud.

So it's strange then that as Vince Cable and others beat the transparency drum, there remains a legislative appetite to exempt micro-business from filing statutory accounts at Companies House. A fine idea on the surface you might think, with Government red tape after all being the perennial bugbear of the British entrepreneur, but those lauding this approach could do worse than pause for a moment and reflect on the cliché that 'information is power'.

Why? Because in a market where, whatever their Project Merlin inspired protestations to the contrary, lenders remain extremely cautious about lending to small firms, the need for accurate and up to date information about the financial strength of companies is greater than ever.

When push comes to shove, being able to give accurate positive insight into the stability of an ambitious growing company could make the critical difference between funds being extended to get an enterprise off the ground, or secure the investment it desires to break into a new market or fund a new product or service launch.

This is why credit reference agencies such as Graydon UK are doing everything they can to protect the integrity of the data held at Companies House, important as it is to ensuring that the credit reference assessments they produce and provide to potential lenders, investors and suppliers give a true representation of businesses.

It's also why Graydon UK is throwing its weight behind the work of The Business Information Providers Association (BIPA), an association of the five principal Commercial Credit Reference Agencies in the UK, to reduce the risk associated with business transactions by ensuring rating assessments are based on accurate analyses of business.

After all, our business is about helping companies feel assured they can transact with confidence and optimise their credit decisioning capacity. What's more, we're here to help businesses showcase their financial strengths and potential for sustainable growth. So, its natural for us support BIPA and the information delivered via its new website, www.bipa.uk.com

There were 656 construction insolvencies in Q4 2011. When the statistics for Q1 2012 are published, the name S Barratt & Co (Manchester) Limited will feature. For more than 75 years this family-owned business, trading as Barratt, completed projects in the commercial, retail, industrial and large-scale residential sectors. So what went wrong?

Well, of course, the economic downturn played its destructive role. And, in the more recent past, weakening Government support for solar farms doubtless added to their woes. Financial embarrassment was first evident when their 2010 filed accounts turned red - with pre-tax losses of nearly £1.3M most prominent.

Converting the accounts into ratios, their DSO - a measure of the average number of days that a company takes to collect revenue after a sale has been made - increased year-on-year by 42% to 104. Problems were building and, in 2011, serious pressures on cash flow triggered their demise into administration.

Administrators from Duff & Phelps were appointed on 29 November last year with the loss of 43 jobs. Their report tells us that "three large contractors" submitted Withholding Notices amounting to £3M and this, coupled with the (sadly predictable) withdrawal of solar contracts, sealed their fate. Despite redundancies and cost-cutting, no buyer could be found by the administrators, the business could no longer pay its debts as they fell due, and it was declared insolvent.

Now, sub-contractors and suppliers are owed more than £2M and the report tells us there "may be sufficient realisations" for non-preferential creditors. Let's hope it's more than just pence-in-the-pound.

What can you learn from this sad story? There are industry statistics that can provide a generic trend about your buyer's sector - the Office of National Statistics (ONS) is a good source - it tells us that 5,000 construction companies have been lost in the past two years. Most experts agree that cuts to the Government's capital programme and uncertainty around the economy and financing generally means there is little chance that 2012 will see this trend reverse.

Moving from the generic to the specific, a Graydon credit report will reveal your buyer's accounts and ratios which it will interpret into a rating or score. Their historic rating or score is also included and a trend is revealed. Comparisons of your buyer to their industry sector complete the risk profile. But finally, in the words of Aristotle, it's worth remembering that "the whole is greater than the sum of its parts."

SMEs face many challenges and uppermost among them is chasing: chasing orders and chasing payment. According to research by law firm Lovetts, chasing payments in Q4 2011 was a bigger priority for SMEs than it was a year ago. Today, in an attempt to improve their cash flow, firms are using a Letter-Before-Action after 91 days instead of 97 days. Lovetts chairman Charles Wilson says: "There's definitely a feeling of businesses battening down the hatches to ride out the economic storm."

Graydon's own Q4 research found that 51% of businesses experienced an increase in late payments, so it's no wonder that creditors are chasing harder and faster. What is causing the payment delay and what help can SMEs get?

Legislation can help. Indeed, our research also revealed that 76% of respondents thought the government should do more to protect them against late payment. Judging from past legislation, such as the Late Payment of Commercial Debts Act, they have a point. This Act saw suppliers coerced by big business into accepting longer payment terms against their will, and 56% of our respondents fell foul of this deception.

Prevention can help. Regular credit checks can prevent protracted default but all too often they're reserved for checking out new buyers. Monitoring existing buyers is equally vital because their circumstances can change in a heartbeat. SMEs must also understand how important their own credit rating is too. With access to finance so difficult for SMEs, a strong credit rating will provide a valuable source of reference.

Debt collection agencies (DCAs) and solicitors can help. DCAs will typically charge    5%-10% commission to collect a commercial UK debt and they'll do so on a "no collection: no commission" basis and many solicitors offer Letters-Before-Action at a low fixed cost. Both these third-party solutions provide the escalation element of a collection strategy, and they free the SME to chase orders instead of overdue accounts.

All of this help will go a long way to alleviate the negative impact of late payments. And that's great news for the 45% of our respondents who claim late payments will inhibit their ability to invest in people and services. Help is available to SMEs. And with it they could find poetic justice.

On 9th January we touched on the expectancy of yet a further round of Quantitative Easing (QE), however the week ended with the Bank's Monetary Policy Committee (MPC) voting for no change in the fiscal policy, keeping interest rates at their record low of 0.5% and Quantitative Easing (QE) at £275 billion.

The decision of the Bank's MPC last Thursday, to maintain the rates at their current level, follows three closely watched surveys from the Services, Manufacturing and Construction sectors that pointed to genuine growth in December. Economists believe that the results of these surveys suggest that the British economy may be in a state of stagnation rather than contraction, thus decreasing the need for an expansionary fiscal policy.

QE was last increased by £75 billion in October and David Kern, chief economist at the British Chamber of Commerce (BCC) which represents around 100 000 British businesses, calls for banks to be more generous with the available QE allowance in order to boost growth and avoid any further setbacks.

"Since the challenges facing the UK economy will increase in the first quarter of 2012, a further £50bn increase in QE to £325bn would be welcomed by hard-pressed businesses. An immediate increase in QE would strengthen confidence and help to contain sterling rises against the euro, at a time when we must maintain the competitiveness of our exports. Sterling has risen by some six per cent against the euro in the last three months and this puts unwelcome pressure on British exporters," Mr Kern said.

He continues: "QE will only achieve its full potential to support growth if it is supplemented by effective measures aimed at improving the flow of credit to viable businesses. The government must swiftly implement its promised credit easing measures, and the Bank of England should play its full part in supporting such an initiative."

Economists, however, believe that markets will not be able to contend with more QE at this stage, due to the underlying fact that the last round is not due to finish until the end of February and by holding back on more QE, the MPC is allowed more time to assess whether underlying inflationary pressures are easing. This stance seems to have offered the Bank of England a fair degree of solace, as figures released on Tuesday indicate that Britain's high rate of annual inflation slowed in December, for the third month in a row. We have seen the annual rise in the Consumer Price Index (CPI) slow from 5.2% in September to 4.2% in December - reflecting lower fuel prices and widespread discounting on the high street.

Recent research by Graydon UK suggests that in addition to the QE programme, there is still a requirement for an additional link to improving UK SME's access to finance. Our research which looked at the number of successful company financing deals lodged at Companies house over the past decade indicates that the number of UK companies being granted business loans and mortgages has plummeted by almost 50% since 2007. All UK companies are required to inform Companies House after offering collateral security to a financial lender and our figures indicate that there were 100 000 fewer mortgages and loans being registered in 2011, compared to 2007, just before the credit crunch crisis took hold in 2008.

The Government has recently introduced further assistance to SME's in the form of a credit easing programme announced by George Osborne last October, which aims to improve lending and confidence in the economy. Under the scheme, the treasury will buy small firms' corporate bonds providing cash direct to struggling firms unable to gain funds from the banks. The initiative is separate from the quantitative easing by the Bank of England which is, in effect, the printing of money. The proposal - an admission that banks are still not lending adequately - represents a major step by the Treasury and brings it closer to direct involvement in monetary policy, formerly the sole preserve of the Bank.

(JE)

BOEs Q4 2011 credit conditions survey reported banks seeing a sharp fall in loan demand from small businesses. About as surprising as telling us that there is a sale at DFS. Comment from the Federation of Small Businesses hints at why demand for loans is so low; nearly a quarter of its 200,000 members fear their application would be rejected or the loan terms would be too onerous.

Too onerous indeed. The same Bank of England report tells us the cost of lending increased for businesses big and small. Little wonder then that business has lost its appetite for loans. Companies across the spectrum are avoiding debt because of the cost and because lack of confidence makes them risk averse.

The survey provides precious little optimism for SMEs in this new quarter with loan costs rising and credit scoring criteria tightening. To SMEs, bank loan policy must seem akin to providing umbrellas when the sun shines and taking them back when it rains. And right now the economic rain is torrential. The survey was too early to report the impact of the government's autumn credit easing so we'll have to wait to see if this improves things.

This week it's expected that the Bank of England's Monetary Policy Committee will announce yet more quantitative easing (QE) and push it up to around 25% of GDP. With big companies sitting on a mountain of cash it's difficult for me to see why additional QE should alter their strategy and tempt them to invest.

Deloitte's finance director survey confirms this view with 87% of FDs believing this is a bad time to be taking additional risk onto their balance sheet as their major priority for 2012 is to reduce costs and increase cash flow.

According to Barclays Bank nearly half-a-million new businesses were created in the past year, and self-employment is now at its highest for 75 years. "The UK is in the middle of a boom for start-ups. Our best guess is that in England and Wales we are up 4pc to 5pc in the year to November and that's on the back of two strong years," said Richard Roberts, SME analyst at Barclays. This is consistent with the Office for National Statistics latest Labour Force Survey figures for October 2011 showing that a record 4,138,000 people were self-employed, up 4pc year-on-year, and the highest number since records began.

You may find these statistics out-of-sync with the doom-and-gloom headlines that follow every economic forecast. But wait a moment, isn't consumer confidence the springboard for economic recovery? Entrepreneurs are consumer's too; indeed optimistic entrepreneurs to boot. And optimists are stoical members of society who see prosperity where economists see austerity. Where are they finding reason for such optimism?

Interest rates: They're confident we'll see no increase in interest rates in 2012.
Inflation: They're confident inflation will fall in 2012.
Income: They're confident disposable income will increase in 2012.
Growth: They're confident we'll see economic growth in 2012.
Printing money: They're confident the government will print (QE) £100 billion in 2012.

And there's more; £70 billion more to be precise! That's the estimated value of cash corporate Britain has squirreled away to swell its balance sheets - twice its value before the recession. Money the optimist knows will get spent sooner or later.

At this time of resolutions, shouldn't we all take a lesson from the optimistic entrepreneur? SMEs are the key to our economic well-being so this blog resolves to (continue) backing them all the way. On one condition. I urge SMEs to credit vet each-and-every buyer and remember that an order's not an order until the invoice gets paid. And if you won't take my word for it, then listen instead to the words of the Roman senator and historian Tacitus from 2000 years ago: "Reason and judgment are the qualities of a leader."

In these times of unprecedented economic uncertainty all we can do is speculate, and with speculation its always a good idea to have a hard look at what's going on next door. These blogs will be looking worldwide and discussing the good, the bad and the not so pretty economic developments that are shaping the future of the global economy.

This week it comes as no surprise that Britain's economic forecast isn't getting any brighter. The OECD has reigned in predictions of growth to 0.5%, the public sector went on strike but, as George Osborne keeps telling us, we're not as bad as Italy. This is hardly a ray of sunshine.

Italy is in trouble and its chances to recover and become competitive are scuppered by two things, unions and Euros.

The ability to negotiate labour contracts at a national level has left far too much influence in the hands of the unions. Over-zealous job security has ground the circulation of workers to a halt and reduced labour efficiency. Businesses have restricted their size to avoid union rules, so much so that 95% of Italian companies employ fewer than 10 workers. What's worse is that an estimated 15-27% of businesses exist underground as a sure fired way of evading union rules, according to the IMF, leaving 4 million workers completely unprotected.

The effects of the Euro haven't helped either. Running a persistent deficit once meant a country could become competitive through the depreciation of its currency. With this option locked off by the Euro, Italy would have to default on its Euro-denominated debt to recover. But this will damage its credit rating, hitting Italian businesses hard as credit lines are withheld.

Caught in this hard situation, things are growing desperate. Recent crime figures and registered extortion complaints seem to suggest that the shadow of organised crime is moving north.

Italy's new PM, Mario Monti, is due to announce financial measures on December 5th, thought to include a new sales tax and fast-tracking the pension age increase. But will these measures help Italy grow out of the recession? Not significantly.

An IMF inspection team is expected in Italy within the next few days. No date has been announced and the IMF has declined to comment on whether assistance will be given. Their help will be welcome, but even if a short term fix is provided, Italy will still have to address its unions and more pressingly Brussels will have to address the shortcomings of the Euro (within 7 days apparently).

But it's not just up to the IMF to help out the situation. The worst thing the world can do though is isolate Italian businesses. Putting them in quarantine is the best way to spread the infection. Italian companies will keep working despite the mess created by their politicians, unions and currency (95% of businesses have shown Italian's know how to adapt). If you are worried about working with Italian companies, just get a quick and easy international credit report; investigate the business and then make a decision. In these times of uncertainty what we need is prudence, not fear.