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Background - the number of small business insolvencies is forecast to significantly increase over the next few years. How has this difficult economic period come about so suddenly, taking so many by surprise and what can business owners do about it?...  During the last twenty years millions of new start up small businesses have been created as a result of a favourable business climate; economic stability, the exposition of readily available credit and the relaxation of regulatory regimes.  These elements have helped to created the stimulus for entrepreneurs to build profitable businesses and create wealth. Through the boom years, the number of self employed individuals risking their own money or borrowing to finance their dream, increased dramatically in the UK and in the USA. Most owners simply wanted to escape the rat race and seek a more flexible lifestyle and control their own destiny.  During the 1990's and through the millennium, western economies have enjoyed stable and consistently high growth and historically low interest rates. Business confidence remained high and investment in plant, machinery and infrastructure rose in key industries like telecoms, commercial property, retail, finance and small business services.  Property investment and speculation on share markets meant a growth in the disposable income of small business owners.  Consequently, more and more individuals felt confident about the economy and decided to leave their nine to five routine and start a new business.  Yet, nearly all new businesses need capital to begin and sustain the business until it can grow sufficiently.... 

 

Boom and Bust - to cater for an increasing number of small business entrepreneurs, banks, loan companies and mortgage lenders recognised the changing cultural trends and responded accordingly; people could now afford to borrow relatively cheap money in the form of unsecured loans or secured loans (usually secured against their personal home or other personal assets).   Thousands of readily accessible new personal and commercial lending products were created. Banks provided easy online applications and, in branches, they provided a helpful 'small business advisor', (whose primary measure of success was to lend businesses money).   As the internet increased in usage and sophistication, financial comparison sites emerged that enabled thousands of mortgages, investments and loan products to be compared and purchased instantly.  A huge number of financial incentives were created to increase customer borrowing, from free valuations on mortgages, to air mile points on personal unsecured loans. Worryingly, lenders starting incorporating an automatic credit history report into the online loan application procedure.  Loan companies were now able to offer credit to businesses and individuals from their websites or over the telephone from call centres around the world.    The culture of risk and reward was fostered by the policies of Governments around the world; their primary goal was stable economic growth via small business tax incentives, market deregulation (such as European Union treaties) and privatisation in sectors like telecoms, utilities, financial services and travel.  At the same time they did little to tighten commercial mortgage lending affordability controls or quantify levels of bad debt in the booming commercial and housing sector.  In the good times, mortgage borrowing was not regulated or capped, relative to individuals personal incomes.   By 2008, the level of individual personal debt for unsecured loans now stood at £220 billion in the UK and a staggering $2.2 trillion in the United States.

 

During this period of growth, businesses of all sizes have had to cope with market uncertainty,, market volatility and a constantly changing market environment; competitive threats from foreign imports,  foreign skilled workers; online threats to traditional bricks and mortar businesses as well increased stock market volatility... History has now shown that the introduction of new Government rules and procedures (through legislative market regulation), has not kept up with the pace of major business events.  For instance, the accounting scandals and frauds of Bearings Bank, US Savings and Loan and Enron created sharp falls in stocks and shares, while denting future confidence and credibility.  Despite tightening up of regulatory checks and balances following these events, further unexpected market shocks such as the UK based Northern Rock collapse occurred which regulatory controls did not identify in time.  

 

The Credit Crunch - this long period of growth has turned to decline more recently, as a range of different global factors have simultaneously conspired to create what is now commonly referred to as the credit crunch.  Soaring oil and food prices from growing economies like China and India help push up inflation in the West.  While consumers struggle to cope with the rising cost of living, the credit crunch meant banks are even nervous to lend to each other.  Major banks have increased inter-banking interest rates and tightened lending criteria to the public.  Some smaller banks, mortgage lenders and loan organisations could not (or have chosen not to) continue to re-finance some high street business lending.  Consequently, both commercial property and the already over valued residential housing market have collapsed, as the reduced money supply strangles business confidence and new investment.  To make matters worse, cash strapped consumers and the business world have reduced household spending and business investment.  This is severely impacting small business cash flow and sales.   

 

As a result, business confidence in the United Kingdom is now at its lowest level for 16 years with economists predicting a full blown recession before the end of 2008.... thousands of cash strapped small businesses are in serious difficulty and many are considering re-financing or their Director or Sole Trader owners implementing personal debt management plans.   Many are trying to improve cash flow and reduce overheads through debt factoring, credit repair and better cash flow planning.   Unfortunately, some business owners have simply taken on too much historical debt. In these cases an increasing number have no choice but to opt for formal insolvency process such as Company Administration  or a  Company Voluntary Arrangement (CVA).  Unfortunately, some business fail and end up going into Receivership or Liquidation.  From a personal perspective, because many business owners have borrowed equity from their home or taken out secured loans on personal assets to fund their business, an increasing number of business owners are opting for Individual Voluntary Arrangements (IVA), Informal Arrangements or even Bankruptcy.  Of course, there are many other internal business reasons why businesses fail and get into difficulties, (outside of external economic pressures); poor sales and marketing, financial mismanagement, bad debtors from customers, staff fraud or staff turnover.  In addition, small business owners may have personal factors that have indirectly led to the creation of unwanted business debt; lower income due to divorce or separation, ill health or pregnancy.

 

Business Survival - most small businesses are underfunded and do not have the professional management resources of large corporate organisations. Yet the more entrepreneurial small businesses exist in the economy, the greater global GDP the economy becomes. Small business accounts for 60% of the UK workforce. Most entrepreneurs start their business in order to take control of their own destiny, or to create employment of the family, then to capitalise on their skills and experience. Entrepreneurs need complete commitment, the ability to work hard and the ability to adapt to constant changes in the business environment. The main reasons why some businesses fail are because of lack of pay, lack of accounting controls, lower sales turnover than expected, bad debts and fierce competition. Too many business owners concentrate on profit without forecasting cash flow problems such as unforeseen expenses or bad debt. In this section we have provided some useful guides, tips and hints for improving skills and contacting specialist providers of small business services.

 

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