Surviving the Credit Crunch in 2008
At the moment we are being bombarded with cautions about the UK economy and the impact that bank losses on US sub-prime mortgages are having on it.
Meanwhile £56 billion pounds of public money has been committed to Northern Rock; an ‘investment’ that was made by the current government in the full knowledge that it was insolvent at the time; allegedly ‘to protect the economy’. However there is another issue lurking in the economic undergrowth at the moment that is to do with small and medium sized companies, who between them generate half of this country’s GDP.
Because many such companies have not had that much time to develop balance sheet resources that can fully support their operations, especially if their businesses are young and progressive, it has become common practice for banks to look to the proprietor’s or principal directors’ personal assets for collateral when considering requests for financial support; and that usually means the family home. The problem that could arise this year though is that as house prices fall in value and the costs of servicing the mortgage rises, the perceived gearing associated with bank financing will fall with it.
If this then becomes a green light for a tightening up of credit to such companies, there is a risk that at a time of abrupt change in the economic outlook, some companies at least may find that the banks attitude to expanding or even in some cases maintaining the current levels of credit will be very different to the past few years.
In other cases companies whose facilities are not secured by personal guarantees may find themselves being asked to do so.
However, the good news is that the last thing any of the big banks wants to do at present is to generate a wave of problem accounts when they have their hands full elsewhere.
Nor are they interested in calling in their collateral, which they regard as the option of last resort; unlike many fringe lenders. Therefore the first priority of a cutback will be focused on those clients who are known to be struggling.
The second level is where the bank is unsure as to a client’s outlook for the coming year and this is not a club that you are recommended to join. The way to pre-empt this is to start a new business plan based on the assumptions that inflation, a tight market and control of both stock and cashflow are going to be different this year. Profits of course come into it too but in the short term it is your ability to manage your cashflow that will be most exercising the bank manager’s mind.
It is likely that a set of forecasts predicting huge growth in sales and profits will be viewed with a jaundiced eye this year, in the absence of irrefutable evidence.
Given that the last few years have been relatively easy ones for growth, banks will be looking for signs that your plans include contingencies for a downturn. This means that when planning your profit and cashflow forecasts you may well be presented with the need to make hard decisions.
Your own first priority however must be to deliver those forecasts and 2008 is not a year where holding back on them is going to be an option.
Written by guest author Joe Jonkler who runs the financial planning website figurewizard
