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Red alert for May 7th

Julie Palmer, regional managing partner at Begbies Traynor, explains why the general election – whatever the result – could be a challenge for the credit sector.

Julie Palmer
regional managing partner, Begbies Traynor

As the coalition government approaches the final few weeks of its life, there is sure to be an intense debate among historians and political pundits alike over the government’s legacy.

For a start, the actual existence of a coalition government is a rare event in Britain, while financial challenges on the scale faced over the past few years are thankfully rarer. But perhaps for the lending industry, the defining legacy of the past five years – and more – is cheap credit.

The phenomenon has been great for consumers, if not for savers, particularly in austere times, and with the recent dip into negative inflation, pay packets have started to stretch further than they have for a while.
But for businesses that have struggled to turn a profit through the economic downturn, cheap credit has been nothing short of a lifeline.

Indeed, Begbies Traynor’s research into corporate financial distress has shown there are more than 430,000 businesses dependent on credit for their survival. On the flip side of this, the phrase ‘zombie company’ has become a familiar refrain amongst financial journalists.

At the beginning of the recession it was a combination of forbearance from creditors, “time to pay” arrangements from HMRC, the financial crisis and low interest rates that allowed these highly-geared, break-even businesses to survive.

And while the recession could have been much deeper had so-called zombie companies been allowed to fail, there is now a growing argument they could actively hamper the recovery. Keeping zombie companies alive might well hold back more successful businesses which need the additional turnover to continue their development. Instead, they are piling up cash.

But this, perhaps, is a debate for another day.

Given its work in business rescue and recovery, Begbies Traynor is very much interested in what happens next with regard to the cost of credit. Whilst those historians and pundits get on with debating the past, our sector will be very much looking to the future.

A combination of a recovering economy and a five-year gap before the next general election surely means the next government will struggle to resist a small interest rate rise, if only to gauge the impact of such a thing. Therefore our advice to businesses is to take action now in order to avoid the effects of more expensive credit.

Yet for many of those 430,000 zombie companies, a rate rise might spell disaster. It would almost certainly mean an unfortunate reversal in the declining trend for insolvencies, as seen in the ONS figures for October to December 2014.

In general, the upcoming election should be something of a red alert for the credit sector. A rate rise is something for which we will all have to plan – and innovative solutions for highly-geared, marginally profitable companies will be required if we’re to maintain the momentum of the recovery.

Where the insolvency profession can add value and provide assistance is by advising businesses on how to become more sustainable while continuing to deliver for clients. This might involve reviewing assets; for example, does a business need to operate over two sites? Perhaps there is a technological solution that could allow staff to work from home? For some company owners this might be difficult to contemplate, but staff can often be more productive when not being disturbed by ringing phones and queries from colleagues. That’s got to be better for business.

There are also more difficult solutions such as reducing your workforce. But never assume that every single member of staff wants to stay with you – they certainly don’t love your business as much as you do, and may even be looking to part ways. For firms that opt for a programme of redundancies, financial assistance might be available from the Insolvency Service’s Redundancy Payments Office.

If the sector pools its knowledge and expertise, then we’re sure to achieve better outcomes for heavily indebted businesses. After all, the more companies that find themselves unable to service credit agreements, the more perilous life becomes for lenders – as we learned in 2008.

Julie will be speaking on the topic Distressed, survival businesses and reluctant borrowers: What advice is available?, at the Commercial Finance Conference at this year’s Credit Summit, to be held at the QEII conference centre in London on 26 March.

Posted on 24th March 2015 by Fred Crawley



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