A Ticking Time Bomb?
The annual Credit Check survey from Venture and Accountancy Magazine indicates that almost two thirds (60%) of accountants believe that a further increase in SME insolvencies is still to come. Philip Smith from Accountancy Magazine, examines the results
Much hope is being pinned on small and medium-sized businesses to drag the UK out of recession, but the odds of growth in this sector do not look good.
A lack of confidence, together with low levels of trust, are putting the brakes on economic recovery, as companies struggle to find finance amid fears of an imminent cash crisis. At the same time, the number of creditor and debtor days is increasing, meaning that as companies have to wait longer for their invoices to be paid, they in turn are taking longer to settle their own accounts.
All of which points to a squeeze on working capital, and the need for companies to look elsewhere for the necessary
fina
nce to invest in future growth. And as is becoming clear, finding finance is proving a struggle.
These are some of the worrying conclusions that can be drawn from a study of accountants and their clients carried out by Venture Finance and Accountancy. The survey of 250 UK accountants revealed that despite the economy’s tentative return to growth, more than a third (36%) of SMEs are still being held back by the long tail of the recession, performing worse in the second quarter of 2010 than in the same period in 2009. One in three accountants now classifies UK business strength as weak or very weak.
Risk of a Double Dip
But what is more worrying is that accountants are now warning that the worst effects of the recession have yet to hit this engine room of the economy, putting at risk the UK’s recovery – predictions of a double dip might not be too far from the truth.
Against this background, the research by Venture Finance and Accountancy suggests that SMEs are adopting a siege mentality. According to the accountants surveyed, increasing instability is forcing their clients to mistrust customers. They say that more than two-thirds (70%) of businesses have lost confidence in the creditworthiness of clients. It would appear that their mistrust is well placed since 60% of accountants have seen a rise in bad debt among their clients in the last six months. It is no wonder therefore that almost half of the accountants in the survey have witnessed their clients increasingly demand money up front from their customers.
This mistrust is only part of the story, though. Businesses are still planning for growth, much to the concern of their accountants, who understandably fear that their clients don’t have the necessary working capital and are in danger of over-trading – one of the more common reasons for insolvency during an upturn. One third of accountants say their clients are turning away work due to working capital shortages, a statistic that cannot be encouraging.
The research also uncovers a time bomb – accountants say that more than a quarter of businesses (27%) are shrinking and some are even dying due to a lack of working capital.
This is an issue that is vexing senior economic policy makers. Much of the blame is being laid upon banks that are reluctant to lend to their business clients. A discussion document put out by HM Treasury, Financing a Private Sector Recovery, argues that SMEs are vulnerable due to their reliance on bank finance and the problems this has caused.
Money, Money, Money
The British Bankers’ Association more recently said that new loans to small firms increased by £75m between May and June 2010, but year-on-year term lending has decreased by £269m, compared with June 2009 – when the economy was still in recession.
Average monthly loans have declined by almost half since 2008, when banks lent an average of £991m to small firms. In 2010, the average monthly loan rate is £564m.
To be fair, the banks and their industry groups have claimed that lending is down simply because demand is down and they are doing everything they can to increase the flow of finance to business.
According to research carried out by the Open University Business School earlier this year, supported by the Finance and Leasing Association, 16% of small and medium-sized businesses needed to replace old equipment or invest in new equipment to expand but were unable to do so, with lack of finance a significant factor.
The FLA said that too few businesses are exploring alternatives to traditional bank lending. This view is backed up by the Venture Finance/Accountancy poll, which found that accountants believed SMEs needed to widen their financial ‘menus’ to find the necessary working capital – over half reckoned that invoice and asset-based lending was the most effective form of financing to support SME growth.
Peter Ewen, Venture Finance’s managing director, says: ‘SMEs are the engine of economic recovery but the research suggests that they are still struggling to access the finance needed to move from a survival mentality to one of growth. Accountants are telling us that traditional financing methods are not meeting today’s business needs and it is essential SMEs understand the full repertoire of funding they can access.’
Six out of 10 accountants believe the worst is still to come for SME insolvencies.
Seven out of 10 say the upturn won’t come before cash availability improves, while eight out of 10 report their clients have lost faith in traditional finance sources.
Perhaps these businesses should listen to their accountants – surveys continuously reveal that accountants are the most trusted business advisers, and even if they can’t trust their customers, SMEs should trust their accountants.
Stats courtesy of Venture's
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