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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.
