despite the downturn most banks will still lend
kevin johnson corporate finance partner at Spofforths Chartered Accountants, says that despite the downturn most banks will still lend
In the midst of widespread gloom in business about the UK’s economic prospects, the only point that all the finance providers can agree on is that they have little idea how long this downturn will last.
The banks are still adjusting from the initial impact of the credit crunch. In common with everyone else, they do not fully understand where this trend is going. We can all predict – fairly confidently – that things are going to get worse before they improve, but we don’t know when the market will hit rock bottom. The recovery could start next year or we may find that the lean times will prevail for a couple of years or more.
The credit crunch has already influenced lending policy in the banks. When the credit crunch bit, the banks stopped lending to each other and they’re still trying to sort out precisely who’s been left holding the hot potato. Since then they have been far more risk-averse when it comes to extending facilities to their customers. If they don’t feel safe lending money to another bank, what chance does an ordinary small business have?
Money is certainly harder to come by, but all of the banks that I speak to insist that they’re still lending – and so, in general, they are. But lending now tends to be only for the safer bets and you’re likely to have to pay more for it. Even more so than usual, a premium is placed on experienced management and a good track record.
It’s also noticeable that there are currently considerable differences between the lending policies of different banks. This is a function of both widespread confusion about the nature of the economic climate and the mix of circumstances that individual banks find themselves in. Lending policies within banks are evolving all the time and on occasion I’ve found that this has led to some confusion at branch level as to exactly what currently policy is!
I recently sought funding for one of my clients from a leading high street institution. The team at the branch had no doubts that it would be funded. But it was eventually dismissed by the credit committee. On a different project, we went to see several different lenders. One contact, at another high street institution, initially rejected our project. A few days later, we were introduced to another manager in a different branch of the same bank. He expressed interest and we secured the funding.
Whilst there are certainly some common sectors about which all the banks are nervous, for most funding needs it may currently be sensible, or even necessary, to talk to more banks than would ordinarily be the case. I rarely advocate touting opportunities to all and sundry, but with current confusion and the increased costs of funding, it can be well worth shopping around.
But it will not last forever. Eventually a common consensus will form regarding the state of the economy, it will become clear how each of the banks has fared, and a more consistent approach will emerge.
In the meantime, it is still possible to secure funding if you prepare well and are ready to persevere.
Why cashflow has assumed a critical dimension Kevin Johnson, corporate finance partner at Spofforths Chartered Accountants, explains why cashflow is key in a downturn
Recording and monitoring cashflow is a key management discipline. It is essential for any well-managed business. Cash is the engine of the enterprise. It allows a company to keep going: to pay its staff and suppliers, promote its products and services and meet its obligations. Even when profits and margins are tight, sound cashflow management can keep a venture afloat until more lucrative times arrive.
Without it, companies may not be properly equipped to understand when cash is due in and how they are going to meet outgoings. There is less appreciation of the continuing health of the enterprise.
In positive economic times cashflow measurement is a powerful tool for managing business risk. In downturns cashflow forecasting can become critical.
Late payment by customers is a very common cause of cashflow problems. Customers experiencing financial pressure may start to push their terms which can mean progressively later payment of invoices. Directors need to understand how this might affect their business and early trend information allows decision-makers to take informed choices.
For example, some customers may respond well to a modest discount for prompt payment. While this can be very little in terms of the actual amount, some customers will respond, partly, I suspect, because it demonstrates that supplier and customer are both in the same fix. And a small discount means recognition of shared difficulties.
In cases where there are more extensive late payment issues with specific clients, a sliding scale of charges could be introduced to improve early settlement. But in some cases it may be necessary to consider the more difficult decision of ceasing to deal with certain customers entirely.
If this downturn becomes prolonged, as many think it will, cash resource may become strained by a range of causes and company directors may be forced to consider unpalatable choices such as laying off staff. But having an effective cashflow forecasting system can be the difference between survival and insolvency.
The key is that difficulties should not come as a surprise or a sudden shock. Trends can be analysed and, with the time this affords, strategies can be put in place to avert disaster. But the directors must be strong enough to act on what the forecasts are telling them.
Date:10 September 2008