Turning around the economic juggernaut means restoring SMEs’ confidence

Business Secretary Vince Cable warned at the LibDem conference that rebuilding the economy was going to be a long process requiring investment in business, in research and in training people in the skills that will be needed in the future.

We are also told, repeatedly, that SMEs are the primary engine for the country’s growth.

The trouble is that SMEs’ confidence has been knocked for six over the last five years, not least because despite innumerable Government initiatives they have time and again been refused lending by the banks. The most recent figures on the Funding for Lending scheme published earlier this month showed that lending to businesses and consumers had fallen by £2.3 billion since June 2012.

Now the Federation of Small Businesses (FSB ) has produced research showing just how beleaguered SMEs are feeling with more than 56% of those polled believing that the banks just do not care about them and more than a third reporting sharply increased bank fees over the last year. Very few of those polled knew that it is possible to appeal against a bank’s refusal of a loan application.

Worse still only 37% of those polled were aware of alternative sources of lending, such as crowd funding. 

K2 has a comprehensive, free, downloadable guide to sources of business finance available at http://www.k2finance.co.uk . The FSB has also launched a guide, How to Get a Bank Loan, which also covers appealing against refusal, switching banks and other finance options.

Further evidence that a safe pare of hands is not enough for growth

Some new figures on attitudes to innovation from Price Waterhouse Cooper reinforce the point that growth will not come from being risk averse and hoarding cash.

In the UK the most innovative top fifth of companies grew 50% faster than the bottom fifth and, more alarmingly, the survey found that in the UK just 32% of companies regarded innovation as very important, compared with 46% of German and 59% of Chinese companies. Just 16% of UK companies planned to prioritise product innovation in the coming year compared with almost 33% globally.

Further proof, if it were needed, that, while it would of course be foolish to be complacent about economic recovery, the risk-taking, innovative manager is needed more at this point in the cycle than the risk-averse accountant.

 

It’s the political silly season again

The first shots are being fired in the annual round of party conference one-up-manship with Chancellor Osborne claiming that the economy is “turning a corner”.

Oh really?

It may look like that in London thanks to a rapidly inflating property bubble but out here in SME world even to say “turning a corner” may prove to be premature.

Monday saw publication of a survey by the FSB that had found 47% of its members had been refused loans in the last three months and 56% felt that banks did not care about SMEs, the much vaunted “engine for growth”.

On the same day, with the Banking Reform Bill due for debate this week, the Chief Executive of the British Bankers’ Association warned that requiring banks to improve their leverage ratio (money lent out in relation to capital reserves) could “do more harm than good”. Contrast this with Sir John Vickers, who was involved in drawing up post-crisis reforms to the banking sector and his arguing that the suggested ratios are still way too low and risky. Sounds like joined up banking!

In addition the banks are facing an estimated £10 billion in potential payouts to businesses mis-sold interest rate protection and hedging products. Other news such as the trade gap (between imports and exports) doubling in July and questions about where the demand will come from all challenge the notion of ‘green shoots’.

Businesses, like consumers, are under increasing pressure from rising prices, and continue to focus on cash flow.  While there may be a bit more optimism around it plainly has not yet translated into anything as definitive as turning a corner.

Lies, damn lies and statistics!

A safe pair of hands does not include plans for growth

UK companies are reportedly hoarding as much as £700 billion in cash. Despite this, business investment grew by just 1.7% in June, according to Bank of England Governor Mark Carney, in his first speech to businesses in Nottingham.

It appears that businesses are still not confident of sustained economic recovery, and this may be understandable following the shock waves after the onset of the global economic crisis in 2008.

When times are hard the general rule is to put an accountant in charge as they will basically hoard a company’s cash.  Accountants are generally pretty risk averse and when the emphasis is on controlling cash flow they are a mainstay of business survival.

But at what point in the cycle should companies start to look at investment and growth for future profits? And at what point should accountants take a back seat and hand over to someone else?

In UK we tend to be slow to adapt to changes in the market. Let’s face it no one will criticise managers for not losing money. Only too late will shareholders realise they have been left behind.

We are still pursuing a strategy of hoarding cash when perhaps the time has come to shift from pessimism to optimism and at the very least we should be planning for growth. Now is the time for carrying out market research, modest investments, testing markets and building capacity for growth. 

We need managers with courage, managers who value mistakes and will learn from them, managers who know how to grow businesses.

Pre-packs under scrutiny again?

Baker Tilly’s purchase of the debt-laden accountancy firm RMS Tenon has put the use of pre-pack administration under the spotlight again. It follows other recent high profile pre-packs such as Dreams and Gatecrasher and the debate about Hibu as publisher of Yellow Pages.

While a pre-pack may be a useful tool for saving a struggling business by “selling” its business and assets to a new company immediately upon appointment of an Administrator, the consequences to unsecured creditors and shareholders can be catastrophic as it normally involves writing-off most of their debt and all the investors’ equity. The only beneficiaries are normally banks and other secured creditors who control the process through their appointed insolvency practitioners.

In the case of RMS Tenon, which had more than £80.4 million of debt, unsecured creditors and investors are reportedly furious that their entire debt and shareholdings have been wiped out, the more so because Lloyds TSB, its only secured lender, allegedly forced the sale by refusing to grant a covenant waiver while at the same time agreeing to finance Baker Tilly’s purchase of the assets of RMS Tenon.

While the sale has safeguarded the jobs of around 2,300 RMS Tenon staff, and this is surely to be welcomed in the current economic climate, there are plenty who will once again question pre-pack administration. It may be legal, but is it an acceptable and ethical method of rescuing a business in distress? There are other restructuring options that offer a better outcome for creditors and shareholders, such as Schemes of Arrangement and Company Voluntary Arrangement for instance. But all too often these are not pursued.

As the UK economy proceeds along its halting path to recovery the last thing that is needed is short-term and self-interested behaviour by secured creditors.

Administrator’s fees of £500k for a small firm

This shocking story in the Daily Telegraph did not name the insolvency firm who built managed to charge a staggering £500,000 for the administration of a small company with 40 employees, see http://tinyurl.com/jwzlcmc.

It appears that secured lenders pulled the plug on this small shopfitting business, presumably to recover their secured loan. The article refers to 10p in the £1 being paid to unsecured creditors.

Given that secured loans are paid ahead of the insolvency fees and that these are paid ahead of unsecured creditors, then this business had significant assets. While the fees will have been justified as representing the time and costs incurred in performing their duties, administration fees also need to be proportionate. Stories like this don’t do the insolvency profession any favours.

Insolvency firms will always justify any adopted procedure and its associated fees but sometimes we might question whether they are justifiable.  If there were sufficient funds in the business to pay such fees then why wasn’t an effort made to restructure and save it such as by using the much less expensive CVA (Creditors’ Voluntary Arrangement) procedure?

Indeed who was advising the directors and shareholders? Too often directors make the mistake of trusting the advice of an insolvency practitioner who is normally working for the secured or unsecured creditors. They rarely ever appoint their own advisors.  

All too often a company in difficulty is closed down rather than being restructured. In most cases everyone loses out: directors, shareholders, unsecured creditors and employees. 

The only “winners” in an administration are the insolvency firm and the secured creditor that appointed them.

Business pain in a recovering economy

There are two things happening that suggest that signs of economic recovery are believable, rather than government spin.

The first is the narrowing of the trade gap with a significant growth in exports in June and the second is a 10% rise in business insolvencies (compulsory and creditors’ voluntary insolvencies) in the quarter from April to June 2013 (3,978) compared with January to March (3,601).  However, there were actually slightly fewer insolvencies this year when compared with the same quarter in 2012.

Insolvencies generally do increase when an economy is coming out of recession because creditors normally start to lose patience and begin recovering debt when they can see signs of a rising market.

This time, however, I believe something else is going on.

Firstly, for more than two years now businesses have been focusing on paying down debt so why should creditors suddenly lose patience? Secondly, it may be that HMRC is taking a tougher line on collection of arrears now.

But most importantly now that the owners and directors of businesses can see the future more clearly, and there is greater optimism around, they are starting to restructure their businesses because clearly any future growth is not going to be fuelled by business lending.

It is perhaps no bad thing that growth is likely to be slow and steady and will be achieved by businesses ensuring they have enough working capital, by imposing tough payment terms on customers and suppliers and by everyone in the supply chain working together.

The worrying thing is that in other circles there is still too much reliance on a consumer-led recovery and that exports to non-EU countries were lower, playing no part in the narrowing of the trade gap.

Unintended consequences

Turning around a struggling economy, like turning a business in distress, is a complex process where it is wise to be mindful of the possibility of unintended consequences.

Here are a couple of examples of ideas and policies that seemed like a good idea at the time.

First, of course, was the idea that it was possible to mitigate the risks inherent in subprime mortgages by packaging them with safer loans and creating complex insurance products for protection such as Credit Default Swaps and we all know where that led us in 2008.

More recently, despite many warnings against creating new housing bubbles, the Government’s Help to Buy lending scheme was supposed to encourage construction firms to start building sorely-needed homes.  What has happened so far? Anaemic growth in house building, surging house prices and an explosion of Buy to Let mortgages.

Removing planning restrictions in order to make it easier to convert redundant High Street shops into homes is one scheme of many to revive struggling High Streets.  How about actually addressing the issue of sky high business rates, last set in 2008 before the financial crisis with a review postponed until 2017?   There are approximately 40,000 High Street shops currently empty. Why would anyone start up a new retail business when business rates are so high?

I am sure you will all be able to come up with many other examples. 

Two questions: why do we seem to be incapable of learning the lessons of history? Do we rely too much on social, economic and business models that can never accurately encompass the complexities of real life and real people?

Can employers expect loyalty from workers on Zero Hours contracts?

Employee consultation and support can, in our view, make a huge difference to success when a company in difficulties is being restructured.

But it has emerged that as many as 90% of Sports Direct employees are employed on part-time, Zero hours contracts, and therefore are unlikely to be eligible for the company’s recently-announced bonus payouts. It has been reported that only full-time employees are eligible for the bonus.

Given that these contracts are now used for about 1 million UK employees we should question them. 

The advantages to the employer are obvious in that they only pay for workers’ time as and when needed and there are reduced, or even no, entitlements to sickness and holiday pay, thus enabling a company to keep its overheads under control.

Despite their flexibility, which may be appropriate for a very few employees, the contracts offer few guarantees or certainties and yet could result in considerable hardship for employees due to them being expected to be available at short notice without guarantee that they will earn enough to provide a living wage.

At the same time employees on Zero Hours contracts are viewed as being in employment and therefore not eligible for any state help in weeks when they have had no work or pay.  Nor can a worker on such a contract take on any other work to supplement their income if they are required to be available at short notice.

We believe they could be abused by employers and support Business Secretary Vince Cable’s initiative for a review of Zero Hours contracts and how they are being used.

Will the new Employment Tribunal fees give employers some protection?

On the face of it the new charges on employees seeking redress for workplace issues via tribunals could be good news for employers, particularly SMEs.

In theory, as the FSB has pointed out, the £160-£250 to lodge a claim and the £230 or £950 fee if the case goes ahead ought to deter weak or frivolous claims that businesses have hitherto felt obliged to settle without contesting for fear of huge legal bills.

A client of mine recently had a male employee who, after a couple of warnings, was then made redundant. Despite ample evidence that he had had several recent girlfriends he then took the company to tribunal, encouraged by a solicitor’s no win no fee deal, for unfair dismissal on grounds of his sexual orientation as a gay man! The company settled out of court for £7000 for fear of high legal costs if they contested in court.

When turning around companies I believe in working with the unions or employee representatives when reorganising staff or redundancy. Indeed K2 now has a former union official who as our ‘Employee Liaison Officer’ specialises in managing the process. Equally, it is important that employers follow all the correct procedures when using redundancy.

However, there are some caveats about how effective a deterrent to weak claims the new payments will be.  Firstly, Unison has been granted permission for a judicial review on the introduction of fees. Secondly, costs can be reduced where there are multiple claims of two or more people against the same employer. Similarly fees can be significantly reduced or waived where a claimant cannot pay.  Thirdly will the new fees deter the “ambulance chaser” lawyers offering no win no fee deals?

In our view the jury is still out on whether this new ruling will make life easier for employers. What do others think?