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The credit crunch - don't be a victim

15 May 2008

Sub-prime property lending the other side of the Atlantic may seem of little relevance to small and medium-sized businesses in the UK but in today’s global village the impact of a major financial crisis can be far reaching – less like ripples created by a stone hitting a millpond and more like tsunamis radiating from an undersea earthquake high up the Richter scale.

We don’t want to overstate the problems of the credit crunch, but businesses not yet feeling any effect should not be lulled into a false sense of security. It can take time for the reduced liquidity in the system to reach all parts of the economy. The property market and banking sector were first to be hit here, as in the US, but the malaise can spread as estate agents, conveyancers and removal firms see workloads reduce.

More generally, consumers perceive that they are less well-off than before as their payments on their over-inflated mortgages stay stubbornly high while the value of their home falls. They begin to tighten the purse-strings and cut their discretionary spending, as their concerns grow about the future and their security. The situation exacerbated by the rising prices of things they have little control over, such as food, electricity and travel. The pressure has reached the High Street and still has more bite left.

Some businesses may be immune to recessionary trends, but for most there is a good chance that trading conditions will worsen. Those businesses that apply the Insight six-point checklist for building sound foundations should be better-placed than most, but the present economic climate does present exceptional challenges. This is because the financiers have had to tighten their purse strings, too (despite what they may say!).

Businesses whose cashflow pattern is such that they depend heavily on bank borrowing need to take particular care. Whilst existing loan and overdraft facilities will most likely remain in place (if trading is adequate), banks could be less willing than for some time to extend extra lending to business customers for whom the going has got tougher.

Similarly, any plans for business growth could for some while be less easy to fund through bank lending, so expansion commitments should be reviewed in order to avoid over-stretching and making sure the proposition is very strong. Where expansion remains justified, projections may need to be more robust to satisfy any lender. Whatever the circumstances, all business should look at cutting expenses and costs wherever possible can help improve cash flows.

Is it possible to see problems before they arrive? Possibly, yes, to some extent. Try to look further up the food chain. What do your key customers do and are their customers in turn likely to be vulnerable? Is it time to exert more control over customer credit?  At the end of the day, the credit crunch is just an extreme form of a problem that can afflict any unwary business at virtually any time.

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