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Accounting & Bookkeeping

A chance to get involved in a much-needed review

The terms and conditions governing most financial transactions affect us all in both our business and our personal lives.
A modern, properly transparent and regulated personal property security law, or transactional law, is central to the functioning of an economy, affecting everyone from small businesses, borrowers and finance providers of all types, creditors and debtors, lawyers, insolvency practitioners and lawyers.
According to Professor Louise Gullifer, executive director of the Secured Transaction Law Reform Project, a wide-ranging project investigating English transaction law, the current situation has serious flaws, some of which follow:
It is a complex mixture of case law and a number of statutes, which may guarantee lawyers an income but is opaque to both them and the non-experts it might be affecting.
Current law on fixed and floating charges can affect the cost of credit and the willingness of financial institutions to lend especially to unincorporated small businesses, forcing them into structuring themselves in forms that may not be appropriate to their needs in order to access secured finance.
In the case of insolvency, the lack of an up to date, clear and transparent registration system for secured assets can complicate matters for both creditors and debtors.
Business rescue is often hampered by the emergence of security that is not registered with Companies House or on the Land Register. This relates to a lack of transparency about ownership or control of specific pledge assets that distorts most balance sheets such that corporate solvency and viability is often not clear.
This is a wide-ranging and comprehensive project looking into this and the organisers are inviting as many people as possible to get involved, make comments, or raise concerns.  There’s more on the secured transactions law reform project website: http://securedtransactionslawreformproject.org/

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Banks, Lenders & Investors General Rescue, Restructuring & Recovery Turnaround

SMEs still waiting for redress from IRHP mis-selling

Our regular followers will know that we have been keeping an eye on this issue for some time – here’s an update.
More than two years after a scheme was set up to help SMEs recover from bank mis-selling of Interest Rate Hedging Products a Bully Banks conference earlier this month has condemned the redress scheme.
Bully Banks was set up to support SMEs and to lobby for redress for their losses to restore them to the position they had been in before being sold IRHPs.
Many business owners at the conference reported that the scheme, administered by the FCA (Financial Conduct Authority) was failing to deliver. The FCA was described as “indifferent”, unaware and complicit in its handling of the banks under the scheme.
Bully Banks reported that “only 400 SME customers have had consequential loss agreed and those for a derisory £1,800 per customer”. They also reported that more than 35% of those seeking redress had been excluded on the grounds that “they should have been knowledgeable enough to see through the bank’s deceit” and that many thousands of SMEs have become insolvent as a result of the mis-selling. Cynics might argue that some insolvency procedures were initiated by the banks to avoid paying out or being pursued for mis-selling.
Given that plenty of politicians, economists and senior figures in finance were caught out by the onset of the 2008 financial crisis, in which mis-sold complex and incomprehensible financial products played a significant part, and are still struggling to make meaningful reforms to prevent a repeat it is a bit rich that 35% of SME owners are being penalised for a failure to understand the implications of some of those same products.

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Banks, Lenders & Investors Business Development & Marketing Cash Flow & Forecasting General Rescue, Restructuring & Recovery Turnaround

How does a small construction business plan in volatile times?

The construction industry is always a volatile sector whatever the economic circumstances but figures released over the last couple of weeks have been particularly so.
One survey (from Markit) showed a surge in house building in June, along with an increase in the number of workers being taken on by building firms.
Just a week later, figures from the ONS (Office of National Statistics) seemed to contradict this with a reduction of output by 1.1% in May and indications of a slowing in growth.
While the months being surveyed do not precisely match, this illustrates the difficulties for those working in the sector as self-employed or sole traders, effectively as micro businesses, who need to plan ahead.
As small businesses, many builders lack the security of future orders which relates to them reporting difficulties with securing finance, problems getting credit for the supply of materials and labour shortages due to their own fluctuating demand.
For all small business, being able to forecast and manage cash flow relies on market research and is an essential part of planning for both stability as well as growth.
The building sector has been characterised by many firms paying for the last job with income from the next job. This cycle clearly catches up with those firms when the next job is delayed or cancelled.
While stressful to be stuck in such a cycle, it can be resolved but needs either an injection of cash, or the assistance of a restructuring specialist. The initial advice is normally free but rarely solicited.

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Banks, Lenders & Investors Business Development & Marketing General Rescue, Restructuring & Recovery

Regional growth is on hold while we wait for the election

Plainly we’re already hearing political promises ahead of the 2015 election and most noticeably a recognition that the political focus may be shifting away from London.
Small businesses have been saying for many months that the economic picture on investment and their ability to grow is a lot less rosy than in the capital.
Surprise, surprise, Westminster seems finally to be listening with announcements from both Labour and this week from the Coalition on a promised £5 billion of Government investment to be allocated to local authorities and businesses for building homes, improving transport links and for small business support services and new training opportunities.
None of this will happen until after the election at the earliest and that is not helpful for the many small businesses anxious to take advantage of positive signs in the economy.
In the meantime Deloitte has carried out a poll of 112 chief financial officers in bigger companies, which has revealed that while these larger companies were a little more confident about investing and expanding, the respondents felt that the political uncertainty about the election, the Scottish and potential EU referenda were the biggest risks to business.
It would seem therefore that before any “feelgood factor” translates into investment and growth flowing down to small businesses, especially to those in the regions, we need to get the next general election out of the way.
This will provide greater certainty about the future, which in turn influences the confidence about the economy that is needed to justify investment in growth.

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Banks, Lenders & Investors Business Development & Marketing Cash Flow & Forecasting General Insolvency Rescue, Restructuring & Recovery Turnaround

Concern about Start-up support scheme is growing

The Sunday Times has been highlighting issues with the Government’s £150 million Start-up loans scheme, which is administered through the Start-up Loans Company chaired by James Caan, a former Dragons’ Den judge.
Information on the company’s website is minimal unless the user is a potential applicant and goes through the registration process, but using a disclosure of information request the paper has discovered that initially default rates of up to 40% had been expected, but were anticipated to be between 30-35% by the end of the scheme in 2018.
Under the scheme start-ups can borrow up to £25,000 at an APR of 6% which must be repaid over a five-year period. According to both Government and the Loan Co websites these loans are unsecured.
The new businesses also receive mentoring as part of the package, which matches their applications with a “delivery partner” with whom the loan terms have to be agreed.
At the moment around £95 million of the £150 million pot has been lent and of this calculations are that repayments on around a fifth of that money are in arrears, leading to fears that the debts may have to be written off.
Most recently, the paper has discovered, up to 3,000 of the current 18,000 recipients have not been given access to a mentor.
It quotes Mr Caan as saying that mentoring was “encouraged but not compulsory” and that the company did follow up on those recipients who were not using it. He has also said that every effort was made to recover funds.
While, of course, not every new business will be successful, this does raise questions about the anticipated level of failure and the viability of this scheme.
We understand that a criteria for loans under the scheme is the need for a personal guarantee. If this is the case, are we to expect a large number of bankruptcies in the next couple of years? Do get in touch if you have a Start-up Loan under the scheme.

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Banks, Lenders & Investors Business Development & Marketing General Rescue, Restructuring & Recovery Turnaround

How can you as a small business fund the growth of your team?

Zero hours contracts were heralded as a tool that would help businesses to keep their wage bills under control, by only paying employees for the time they spent actually working.
No wonder they were enthusiastically taken up by many large employers and could have been ideal for small growing businesses with tight margins. Regretfully most small businesses do not employ advisers on how to structure such contracts so they are not that common among small businesses who more often use sub-contract or piece-work contracts.
Zero hours contracts have also proven to be a problem because some employers abuse them by using clauses that prevent employees from taking other work even when there was none available with the contractor, leaving the worker with an uncertain income or in some instances no income and certainly no safety net. No wonder unemployment statistics have declined.
Legislation is on the way to change this but it raises the question as to how small businesses can attract and keep the best staff and how they can find the money to pay them a reasonable wage while at the same time developing capacity for a growing business.
It may be that revamped zero hours contracts will be useful to smaller businesses but legislating against the abuses will be difficult. For the moment the preferred option is likely to continue, that of outsourcing work to trusted sub-contractors.
Sub-contractors are often small businesses or sole traders themselves who take pride in their work and have a vested interest in building long-term relationships with clients. Essentially they become part of your team without the cost or obligations of employment.
Collaboration and partnering arrangements offer scope for growing both businesses.
Let us know how you are funding the growth of your team without breaking the bank.

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Banks, Lenders & Investors Business Development & Marketing General Rescue, Restructuring & Recovery Turnaround

Business rates reform – there is a prospect of SMEs being exempt

It is three months since the BIS (Business, Innovation and Skills) select committee of MPs published its findings on the current system of business rates and called them not fit for purpose and in need of fundamental reform.
Its suggestion was to replace business rates with a sales tax, something the Government has rejected on the grounds that the UK already has a sales tax – VAT.
There have been various suggestions from interested parties about what needs to be done.  The BRC (British Retail Consortium) proposed that small businesses with a rateable value of below £12,000 should be freed from paying the tax, something that would benefit an estimated 100,000 businesses.
Most recently the CBI (Confederation of British Industry) has waded in, calling the current system “outmoded, clunky and regressive”.
It has suggested that there should be more frequent rate reviews, that the tax should be linked to rental values rather than land values and that small businesses should be exempt.
Given that despite the economic recovery many small businesses are still struggling to survive and even fewer are able to grow we argue that the impact on them of business rates is “disproportionate”.
It time the Government grasped the nettle rather than kick the can down the road with a further delay that is expected following the Autumn review.
With support from the BRC and CBI, small businesses and their representative organisations should become proactive by lobbying Ministers and MPs for change, especially given the prospect of being exempt from business rates.

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Banks, Lenders & Investors Business Development & Marketing Cash Flow & Forecasting General Rescue, Restructuring & Recovery Turnaround

An interesting idea to stimulate SME lending

According to the Business Secretary, Vince Cable, bank lending to SMEs is being “suffocated” because the Bank of England is blocking reforms to regulations on the reserves lenders are required to hold.
Under current rules, these have to be higher for business lending than they do for residential mortgages because the former are seen as higher risk than the latter. The BoE also claims that the rules cannot be changed because they are set internationally.
Meanwhile the Government’s business bank has so far lent around £780 million and is experimenting with a scheme to underwrite commercial lending to SMEs with Government funds, welcomed by the BCC (British Chambers of Commerce) who want the business bank “radically scaled up” and strengthened.
While at last there seems to be general agreement that there is a problem with bank lending to small businesses there seems to be little idea what to do about it.
Andrew Haldane, writing in the Telegraph has a suggestion, based on a commission carried out in 1931 that identified structural issues in providing SME lending, which was called the Macmillan gap after the Commission Chair, Hugh Macmillan.
It showed that while large companies tended to have a track record for profit and performance, making it easier to establish their creditworthiness, smaller ones generally do not – hence the gap. He suggests that one way of making it easier to assess SME creditworthiness is to establish a freely available credit register or database of SMEs credit history and revenues.
This would bring together data from credit reference agencies, banks, HMRC records and other government agencies to provide comprehensive information freely accessible to potential lenders such as pension funds, insurance companies and companies supplying trade credit.
Would it work and would it help?  Haldane cites “academic evidence” of considerable benefits.
This would certainly identify leads for turnaround and transformation advisers but will it stimulate lending?

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Banks, Lenders & Investors Business Development & Marketing General Insolvency Rescue, Restructuring & Recovery Turnaround

Gut feelings and fair weather advisers

A piece of research among business leaders carried out by the Economist Intelligence Unit recently found that nine out of 10 would be likely to rely on their gut feeling if presented with data that contradicted their intuition.
In a world that teems with business consultants offering guidance on best practice and must do’s of every shape and colour it can be difficult for the small business owner to know whose advice to trust, when to trust it and when to trust their own instincts.
It makes sense for start-ups and SME owners to take advantage of the wealth of support on offer particularly when they can’t afford to employ experienced executives or if they are looking for investment or finance.  However, it can be more tricky when the situation changes from optimism and doing well to one when plans are not working, or one when the business is running out of cash.
When optimism becomes a harsh reality, one reality is finding out about your advisers, most become unavailable, the more so when they are not being paid and the money is running out.
When as a business owner you are overcome with concern, have sleepless nights and are experiencing anxiety, you need advisers who can deal with reality. When running out of cash you need a business doctor to take a cold, hard look at the situation and at the opportunity so they can discuss your options for survival, for growth, or if necessary for closing down with dignity. The right advisers will have contacts for providing finance as well as having experience to help you deal with the issues that are causing you concern.
Most business owners know when they are being spun a line, when they are hearing what they want to hear but the courageous ones listen to their gut instinct while also employing advisers who will challenge them.

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Banks, Lenders & Investors Cash Flow & Forecasting Factoring, Invoice Discounting & Asset Finance General Insolvency Rescue, Restructuring & Recovery Turnaround

How can smaller businesses fund growth in the economic upturn?

 

A new report by the Credit Management Research Centre and Taulia has revealed that UK companies have been relying heavily on trade credit.

It is also well known that traditional bank lending to SMEs declined by 20% in the last 12 months.

This is despite bank claims that they have plenty of cash to lend and a perception that they are declining loan applications. More realistically the decline in bank lending is down to loan criteria being tightened and the fact that credit worthy companies have been paying down loans instead of funding growth.

So how are small businesses going to fund the expected increase in business and orders that come with economic recovery from recession?

If a company accepts orders without being able to finance them it runs the risk of insolvency through overtrading, which is why so many commentators point out that most insolvencies occur during the upturn after a recession.

Given that many good businesses have used the recession to pay down debt, it can be assumed that their balance sheets have improved and therefore they will be easily able to raise finance for growth from the banks.

However there are a lot of SMEs that do not have a strong enough balance sheet to justify traditional funding. Where these sources are not available they are looking to fund growth using alternative sources of finance.

In the past such sources were myriad, such as from friends and family, negotiating deals with well funded suppliers, early payment terms from customers and even credit cards, but the banks remained dominant. Over the past 20 years asset based lending has grown since it can advance more funds than the banks due to the specific pledge nature of its security. More recently we are seeing a new route to finance from peer-to-peer and crowd funding websites.

The website based sources appear attractive and are often easier for obtaining funding but they can incorporate obligations such as a personal guarantee for the loan from the directors.

In April 2014 the FCA (Financial Conduct Authority) introduced new rules on loan-based (money loaned) and investment-based (share subscription) crowd funding that require the lenders to carry a certain amount of capital, to be open about defining the risks and to have resolution procedures in place in case of the lending platform failing.

It is likely that the online funding platforms will become stricter and require more information from borrowers before making a decision, but if used wisely they offer a great source of funding to growing SMEs.

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Cash Flow & Forecasting General Rescue, Restructuring & Recovery Turnaround

The shifting sands of retail

 

There are signs of a re-balancing between online retail and physical stores as Asos posts its second profit warning in three months.

The rise of e-commerce was regarded by many as a nail in the coffin of the High Street because it was spared the costs of expensive rents and business rates, in-store staff and high energy costs.

However, in their enthusiasm, it seems that the champions of e-commerce may not have paid enough attention to some of the additional costs involved.

While prices may be cheaper online, there are some additional costs which are turning out to be significant.

Online retailers certainly reap some benefits from centralised warehousing as opposed to a High Street presence. However they have significant packaging and shipping costs, which are proving a burden when dealing with the issue of returns and who pays for them. The additional staff handling costs can also prove significant, especially when administering returns.

This is becoming a big concern for a volatile sector like fashion and clothing, where, for example Asos  in the UK returns amount to 39% and in Germany 58%.

A major issue is the size labels used on women’s clothes. Another relates to the difference between the item on a screen and the one that is received. I know several women who order many items at a time expecting to return most of them. They choose retailers with pre-paid return policies and often return as many as 90%.

There are two examples of retail outlets that have had consistently good performance even over the last few uncertain years: Next and John Lewis.

Both combine e-commerce and a High Street presence, but crucially, both have introduced a hybrid system, click and collect, where customers can order online but pick up their order in a store.

It will be interesting to see how the online retailers overcome the issue of returns.

Plainly High Street retail is not dead yet.

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Banks, Lenders & Investors Business Development & Marketing General Rescue, Restructuring & Recovery Turnaround

Private Equity, investment and retail

 

Earlier this year we asked whether Private Equity should be involved in High Street retail after several well-known chains had indicated their intention to float on the Stock Market.

They included Fat Face (77% owned by PE firm Bridgepoint), Card Factory (owned by PE firm Charterhouse) and Poundland (76% owned by Warburg Pincus).

Several of these IPOs have now taken place, and one has been cancelled.  Fat Face has withdrawn its proposed IPO after deciding that it would be unlikely to raise money at the level it had hoped.

This was after shares in Card Factory fell 10% a week after its launch and Pets at Home losing 3% since its float in March 2014, and despite Fat Face having increased sales to February 2014 by 8.2% following the previous year’s pre-tax losses.

Plainly PE investors are adopting a more cautious approach to the old financially driven model for realising value. The old model often involved a public to private acquisition, repaying private equity owners by loading the company with debt, and then flipping it back into public ownership.

While the prospect of a quick exit has focused the attention of Private Equity owners on public markets, all too often the valuations don’t leave much for new shareholders. The recent decline in shares shortly after being floated is a reminder of the old model that made Private Equity owners so wealthy, often at the expense of public owners who sold cheap and bought back expensive.

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Banks, Lenders & Investors General Insolvency Rescue, Restructuring & Recovery Turnaround

The new parable of the talents

 

“For to everyone who has will more be given and he will have an abundance. But from the one who has not, even what he has will be taken away.”

This conclusion of the biblical Parable of the Talents (Matthew 25: 14-30) neatly summarises the results of unrestrained and unregulated neoliberal free market capitalism, as propounded by Milton Friedman (Chicago School of Economics), the model by which business and economies have  been run since the 1980s.

But even before the global financial crisis of 2008 (and more so since) economists and academics like Paul Krugman (End this Depression Now), Jo Stiglitz (The Price of Inequality) and Will Hutton (Them and Us) were questioning the model and the latest to wade in has been Thomas Piketty with his dubiously-praised book Capital in the 21st Century.

Piketty’s book claims to provide evidence over two centuries of the ebb and flow of extreme inequality of wealth, leading to his thesis that wealth grows faster than economic output. His conclusion is to heavily tax the wealth creators which proposals have been embraced by those politicians looking to justify tax increases.

Capitalism itself has come under fire since 2008 largely because it has proved such a ruthless and unforgiving system for so many people.  But, it is also argued, like democracy that it is the least worst system for providing the economic growth needed to afford acceptable living standards for the most people.

But is the problem the system itself or its unregulated consequences? And how does any of this matter to the myriad small businesses that are the backbone of the UK economy and its hope for the future?

We would argue that the essential ingredients of a healthy capitalist economy are demand, ideas, investment, resources and leadership – all essentials for running a successful business.

What is a problem, is the outcome that has so badly affected so many people and businesses. In particular the notion of ‘too big to fail’ where the capitalist model of accepting failure was undermined by the political consequences.

This was addressed at a recent conference in London called Inclusive Capitalism, where among others Mark Carney, Governor of the Bank of England, argued for a return to high ethical standards in banking and for recreating fair and effective markets.

Sir Charlie Mayfield, chairman of the John Lewis Partnership, too, defended capitalism as a force for good and for social mobility, but proposed that it required rethinking business conduct and education, encouraging wider ownership  among employees and investing in employee training and development, all of which imply a shift from short term profit-taking or rent seeking to longer term thinking and investment.

All of which, too, is something any small business owner could have told them.

As for Piketty’s claims, at least they are now being challenged by the Financial Times. Increasing taxes on the wealth creators have not increased revenue collection, nor have such policies promoted wealth creation. 

Was St Matthew the first capitalist?