K2 Business Rescue The Emergency Service for Business

Call Tony Groom on 0844 8040 540

The journey for every business is different. We listen to you and your objectives before proposing a plan for survival and growth. We work alongside you and your team and focus on protecting and improving your wealth.

Published on 3 June 2011by Tony Groom

It is obvious why Bank Fees are High and Business Lending is so Difficult

Recently Business Secretary Vince Cable called for significant improvement in

lending to Small and Medium Sized businesses (SMEs) through Project Merlin.

The figures for January to March showed a shortfall of 12% against the £19bn that

represents a quarter of the annual £76bn target agreed with the government for

lending to smaller businesses. The Federation of Small Businesses also reported that

only 16% of its members had approached banks for credit and 44% of those had

been refused. This includes those businesses seeking credit to fulfil firm orders.

Businesses that are growing need working capital to fund the purchase of goods,

materials, marketing and staff for new growth and although some of that can be

obtained by borrowing against the sales ledger (through factoring and invoice

discounting) when they turn to the banks they are being seen as too high risk.

This is actually a reasonable response by the banks where businesses have been

clinging on by their fingernails since the 2008 recession by using up most of their

working capital and therefore according to the bank models are seen as high risk

and facing the prospect of insolvency.

Because businesses are continuing to deleverage by paying down old loans they are

in a vicious circle of decline. The reduction in working capital used to pay off loans

means they no longer have funds to buy materials to fulfil orders nor are they

adequately capitalised to justify new loans. This explains why it is very common for

businesses to go bust when growth returns to the market after a downturn.

A second problem is that once a bank realises that a company with outstanding

debt is in difficulty, it is providing for the bad debt by adjusting its own capital ratio to

K2 Business Rescue The Emergency Service for Business

Call Tony Groom on 0844 8040 540

cushion against increased risk. While the new Basel 111 rules requiring banks to

increase their Tier 1 capital holdings (equity + retained earnings) from 2% to 7% have

yet to be introduced, they are repairing their balance sheets in preparation for

phasing in the new rules between 2015 to 2018.

Inevitably the banks are passing these costs onto businesses in the form of higher fees

and higher interest rates and it is therefore no surprise that some companies cannot

borrow money, even when orders are rising, when they are already seen as a bad

risk.

The third factor in the mix is businesses that own their own premises trying to borrow

against their property. Loans that might have seemed good when a commercial

property was worth a lot are no longer the security they once were because, like the

domestic housing market following the sub prime crisis that sparked the recession,

the commercial property market is in desperate straits. A look at the boarded up

properties on the High Streets and on industrial estates across the UK makes this

abundantly clear.

Those businesses that own their land and buildings but have used them to secure

loans or mortgages can become subject to huge risk related costs due to the

exposure of the bank. This is because banks have so much commercial property as

security already that cannot be either leased or sold. The bank will therefore impose

penal fees in a bid to recover the provisioning costs.

It is no wonder that Bank of England Chief Economist (and member of the MPC)

Spencer Dale recently warned of at least another two bleak years and a high risk of

feeble growth and high inflation.

However, there is at least something businesses can do to mitigate this catch 22 and

survive and that is to call on expert help to look at fundamental solutions recognising

they will not be able to borrow money to limp along as they have been for the last

two years and to thoroughly revamp their business models.

We are not Insolvency Practitioners. We operate within the law to protect our clients and their wealth. Our team has worked for over 20 years to help stabilise and return hundreds of businesses to profitable growth. Once appointed, Insolvency Practitioners do not work for you, they work for creditors and use your company’s assets to pay themselves. We work for you, not creditors.

More Free Resources for Directors and Business Owners in Difficulty www.rescue.co.uk

K2 Business Rescue The Emergency Service for Business

Call Tony Groom on 0844 8040 540

We Save Businesses We provide experienced advice to directors

We negotiate with HMRC and creditors We are on your side

Need Immediate Help – Call Tony Groom on 0844 8040 540