SME directors should be careful when lenders ask for personal guarantees

Personal guarantees beware of sharksObtaining business finance from mainstream lenders, such as banks, has been a problem for SMEs for a number of years, despite various Government initiatives and schemes that were supposed to help.

Even if the bank agrees to a loan request it may be at a very high interest rate or under specific conditions, such as a requirement from the company’s directors to provide a personal guarantee.

However, it is not uncommon for alternative lenders to also request a personal guarantee, and there is some evidence that such conditions may be on the rise, depending on the health of the business and the type of finance the SME is asking for.

Certain SMEs, such as start-ups, sole traders or those with inadequate records to demonstrate the viability are understandably seen by finance providers as high risk and therefore unlikely to be able to get funding without a personal guarantee.

But many directors have only a hazy understanding of the obligations they are taking on.

Read the fine print of a proposed personal guarantee

The Daily Telegraph last year published the results of a survey of 510 small businesses which found that 55% did not know what a personal guarantee was and 21% thought “that it meant a business owner would have to pay the money back on time to the best of their ability”.

Put simply, when a director provides a personal guarantee to a third-party creditor it means that they are agreeing to pay instead, if their company defaults on a loan repayment.

However, this means they are putting their personal financial security on the line, especially if the company is heading for difficulties or is insolvent.

While it may seem acceptable when the company is growing and doing well, circumstances can change, so it pays not only to scrutinise the fine details of any agreement but to also to get advice.

A personal guarantee is only enforceable if it is in writing and has been signed by the guarantor.

Make sure you know the difference between a personal guarantee and an indemnity which in practice tend to be very similar, but the latter is sold as nothing to worry about.

Check also whether it is for a specific loan or for an indefinite time beyond the loan when future loans might be taken out, and sometimes by new directors long after you have left the company.

It makes sense to edit the lender’s documentation to add clauses such as limits to the guarantee, both amount and duration.

It also makes sense to clarify if the guarantee covers the principal of the loan or loan plus any recovery fees which can be considerable.

It is recommended that you at least check the following:

  • What exactly constitutes a default that triggers the guarantee?
  • Is the amount of the guarantee capped?
  • What is the limit of liability of the guarantee?
  • What is the time limit of the guarantee?
  • How do I terminate the guarantee?
  • Will notice be served or can they seek payment on demand?
  • How will the personal guarantee be enforced?
  • What are the terms for any remedy period?
  • How you will settle the guarantee if it is demanded?

While there are obvious benefits for a lender to obtain a personal guarantee, most guarantees are given as a means of getting credit or borrowing money. It makes sense that the guarantor both understands the risks and also considers alternatives. Growing companies generally need finance, especially when they are growing but cash flow can be improved by getting paid swiftly by customers and agreeing delayed payment terms with suppliers. It may be that a business should not grow so rapidly that it is constantly short of working capital.

Finally, it is worth remembering that if a personal guarantee is called upon then the consequences can have a significant impact on the guarantor’s personal finances, and in extreme circumstances it can lead to the prospect of bankruptcy and even losing the family home.


The skills shortage and Brexit – can AI fill the gaps?

the skills shortage and AIAlmost two thirds of businesses in the Engineering and Technical sector say that recruiting staff with the right skills will be a barrier to achieving their business objectives over the next three years, according to a survey published by the Institution of Engineering and Technology (IET) in December.

From medical staff, particularly nurses, to engineers, IT specialists and construction workers the UK has had a skills gap for a number of years and has depended on EU migrant workers, such as engineers and construction workers from Poland to fill the gap.

The latest British Chambers of Commerce (BCC) Quarterly Trends also revealed that almost three quarters of service sector firms (71%) struggled to hire the right workers throughout Q4 2017 – the highest figure on record.

The Brexit effect on the skills shortage

With unemployment at a 42-year low, arguably, the skills shortage situation has been made more difficult by the UK’s decision to leave the EU.

Since the Brexit decision, reportedly, fewer workers are willing to move to the UK and more EU workers have been leaving because of the continued uncertainty about their employment and personal security. Net migration to Britain fell to its lowest level in three years in the 12 months to the end of March 2017 and earlier this month it was reported that the UK had dropped down the league tables of desirable countries to move to.

In an effort to address the skills shortage and improve training, the Government imposed a skills levy, that came into force last year, when larger firms were required to pay an Apprenticeship Levy.

Yet this week the CBI criticised the levy, saying that the strategy aimed at improving the skills base was not working and that the levy had alienated businesses. CBI managing director argued: “We need a skills approach that lasts for 50 years, not five,”.

Whatever the pros and cons of various Government initiatives, any attempt to improve the UK skills base is likely to take a number of years before people are sufficiently well-trained and experienced to either join the workforce or progress up the career ladder.

Can AI fill the skills gap?

Any number of “experts” have predicted the demise of various jobs as technological advances make their skills redundant. McKinsey, for example, calculated in November last year that as many as 700 million people worldwide could be displaced from their jobs by 2030 due to technology.

However, it argues that there will be no shortage of demand for workers, only that the types of jobs available will change and people will find they need to retrain, adapt and become more skilled.

Hubspot recently speculated in a blog that the top 10 jobs at highest risk of being displaced by AI were telemarketers, bookkeeping clerks, compensation and benefits managers, couriers, proof readers, receptionists, computer support specialists, market research analysts, advertising salespeople and retail sales staff. Read the full blog here for the reasons why.

Those least at risk, according to the blog, are those who have people or creative skills and the top 10 of these were HR managers, sales managers, marketing managers, PR managers, event planners, writers, software developers, editors, graphic designers and CEOs.

The ability for AI to act as a substitute for basic skill level jobs in such areas as manufacturing production lines or for delivery services is plainly obvious, but as for the rest it will depend on the sophistication, safety and reliability of the technology.

For example, with driverless cars, there have been a number of collisions reported although it is early days yet, and robots will have to be a good deal more sophisticated and “human” before we use them to provide care for elderly relatives.

As for CEOs, they are safe for now at least but could even their days eventually be numbered?


SMEs are you ready for GDPR?

Decoding GDPROnly one in four SMEs have started preparing for the GDPR, the new EU wide data protection rules that will come into force on 25th May 2018, according to recent research by Close Brothers.

The new rules are intended to increase privacy and protection of individuals by reducing the amount of data held about them by businesses and restricting the use of that data to essential use and only permitted use.

The GDPR also makes it easier for someone to find out what data a business holds about them and for them to ask for it to be removed; it actually goes further by requiring businesses to have a specific reason for holding data about a person.

Failure to act and implement the new rules could incur massive fines and damage your business’ reputation.

Many SMEs have assumed they are too small for the rules to apply, but this is untrue.  It applies to any organisation that holds personal information, whether it be data about staff, job applicants, customers, prospective customers, contacts, suppliers or anyone else.

Essentially, SMEs should know what data they hold about people and ensure that they have that person’s consent to control or process it. One major difference between the UK’s Data Protection Act 1998 and new regulation is that businesses need specific permission from the relevant person who must opt in for the different uses of their data. For example it is legitimate to hold data about an order for goods and use that data to fulfil the order and retain essential information for audit purposes but not to use it for future marketing unless that person has specifically opted in to receive future marketing communications.

It goes further in that the opt-in is required for each type of communication. For example someone may opt in to receive newsletters but not other emails or marketing phone calls. Essentially it restricts the unsolicited nature of each form of communication and allows everyone to change their mind by opting out or unsubscribing at any time subsequent to opting in.

In addition to covering the type of data held and its usage, the GDPR also deals with the security of the data held. It requires a business to ensure the data is secure and is protected from “unauthorised or unlawful” processing, accidental loss, damage or destruction.

The opt-in element will have a huge impact on businesses that in the past have used data to market their products or services. In future, recipients of any communications must opt in before receiving the communications. This means them opting in for each and every type of communication, such as e-newsletters, product notices and brochures, discount offers, surveys and telesales calls.

Compliance with the GDPR after 25th May 2018 will be a legal requirement and I understand will be vigorously enforced by the Information Commissioners Office (ICO). I gather the ICO team has been increased four-fold and will be funded by fines for non-compliance. They have produced a helpful 12-steps guide as well as providing regular updates on their website. There is also an information helpline for SMEs on 0303 123 1113, choose option 4.

What about Brexit?

Britain’s exit from the European Union will not affect UK companies’ need to comply with the GDPR. The UK government is currently updating the 1998 Data Protection Act to include all the provisions in the GDPR meaning that it will soon become part of UK law.

Act now to prepare for GDPR

Security of data held should be checked to ensure it is secure and cannot be accessed by unauthorised personnel or stolen by third parties.

You should obtain opt-in permission from all existing contacts and use every form of contact before the 25th May as an opportunity to solicit opt-in since after that date you cannot contact anyone in an unsolicited manner.

An opt-in option and privacy notices should be included on the website where you ask for contact data.

An opt-in option should be included on all direct marketing materials, both online and in print.

Staff should be briefed and trained about the new regulations and the staff induction process updated for all new staff. The staff handbook should also be updated to cover the GDPR.

Review your contracts with any third parties you share data with and review the terms and conditions with customers and suppliers to cover the new regulations.

For businesses with 250 employees or more, there is also a requirement to appoint a data protection officer

There is not long to go before 25th May so businesses need to be focused on obtaining permission from their contacts to contact them in the future and getting their systems and processes up to date as soon as possible.

Business review complete? Time to review the marketing plan

Business horizon Marketing planThe next phase of the annual business review and subsequent decisions about plans for the coming year is to review the marketing activities, set objectivities and develop a marketing plan for achieving them.

The marketing review should give a clear indication of whether last year’s objectives were achieved and form the basis for setting new ones.

This is true not only for businesses that are intending to expand either their range of products or services, or to try to grow.  No business can hope to avoid marketing itself altogether.

Marketing is not only about hoping to generate more sales, it is also about keeping the business name in customers’ minds and about demonstrating its expertise and its good reputation in its particular sector or niche.

The components of an effective marketing plan

Accurate and detailed profiles of the target customers and clear goals about what a business wants to achieve are the basic building blocks for a marketing plan.

Marketing tools cover everything from the website to social media and e-newsletters to traditional “old school” advertising, PR and promotion using printed materials such as brochures and flyers.

Even if the bulk of business comes from personal recommendations, it is foolish to assume that ongoing referrals will continue. Maintaining relationships by marketing to referrers, influencers and introducers should be included in you plans and especially if you rely on them for work.

As part of the process there are a number of factors to consider.

The external economic climate, competition from new entrants into its market and technological change, to name but a few are all factors that can all affect a business’ viability and resilience and therefore should influence the goals and how to achieve them.

Past plans and continuing with old marketing practices should be challenged. Is it time to change? A website refresh?  Or more radically is now the time to sell via the website?

If your marketing relies on social media, what worked last year may no longer work. Facebook, Twitter, Pinterest and others online platforms regularly change their requirements. For example, Twitter last year increased the maximum length of Tweets, and Facebook narrowed down the criteria by which a business page could increase its reach to viewers.

If your marketing relies on emails or telesales then new legislation referred to as GDPR may render your database redundant unless you have obtained specific permission from each contact that you may contact them, specifically by sending unsolicited promotion emails or calling them. The deadline for GDPR compliance is 26 May 2018 so your plans ought to include soliciting OPT-IN permission from your contacts. I would advocate that the number of contact OPT-INs is a KPI and a useful way to measure marketing success. It might also be used for setting SMART marketing goals (specific, measurable, achievable, realistic, timely).

Clearly if the business plan for the coming year includes the addition of new products or services these will need to be incorporated into the marketing plan. It goes without saying that research is necessary to identify the customers for the new products. Is there a demand? How will the customers be reached? And many more questions that need answers before developing the plan.

Finally, there needs to be a system of regular monitoring of results against the goals the business has set. I have referred to goals being SMART as reviewing results against goals forms the basis for tweaking plans and developing new ones.

Finally, marketing plans should not be set in tablets of stone.  They need to be responsive to the results they are achieving so that they can be refined or adjusted if needed.

Productivity in an unsettled economy

productivity puzzleProductivity in both national economies and individual businesses is much scrutinised by governments, business commentators and business owners as an indication of performance, efficiency and economic health.

The basic components for calculating productivity are the level of output achieved compared with inputs and is normally reported in terms of labour output or return on capital employed or sales per square foot in the retail industry.

At national level improvements in productivity are used to indicate the health of the economy, so that the recent improvement of UK labour productivity in the three months to September by 0.9% announced by the Office for National Statistics (ONS) was welcomed, albeit national productivity is still way below its pre-2008 Financial Crisis level.

In the same way productivity is a seen as a measure of national economic health, so is productivity a measure of the health of an individual business.

It should be noted that the ONS measures output per worker, output per job and output per hour but not the cost of the output where investment in technology would improve productivity as measured by the ONS but it would most likely reduce employment which is hailed as another measure of national economic health.

Why is productivity so important?

In the 21st Century, and a volatile economic environment due to factors such as Brexit uncertainty, increasingly global competition and concerns about inflation, the cost and assessment of risks of investing in improving productivity are complex and all too often are easily put off by unexpected external factors.

The risk of putting off investment in improving productivity often results in service and product quality declining, costs increasing and time to market increasing.

Historically the location of manufacturing was determined by property, labour, energy and time to market costs where the costs of these factors are constantly changing, and new factors are making the equation complicated.

It is helpful to decide what factors are really important and therefore what should be measured and monitored in order to get the right productivity improvements. ‘What gets measured, gets managed’ and critically the choice will have an impact on short and long-term profitability and short and long-term cash flow.

The decision to put off investment in equipment and machinery for instance is likely to involve increasing borrowing and possibly redundancy costs which while great for long-term profitability and cash flow may be risky and may not be affordable if the redundancy costs are high.

At its heart, productivity relates to viability and sustainability. Competition in most markets is fierce and requires a degree of risk taking to stay ahead since falling behind your competitors in terms of productivity means you are less likely to survive.

How can a business improve its productivity?

For many companies a high wage cost was in the past reduced by offshoring or sub-contracting to low cost labour markets, but this introduced time and transport costs. But these benefits don’t last for ever and there comes a time when this model needs to be reconsidered.

A business can be regarded as a system of systems where labour interacts with equipment as a form of efficiency or labour-saving tools. The equipment can replace labour or make it more efficient by saving time. Indeed, robots can work three 8 hour shifts without much down time. However, they need developing, installing, setting up, monitoring and maintaining, most of which requires highly paid labour to replace the often low-paid workers that did the work before being replaced by robots.

IT offers huge scope for improving productivity through new systems, whether processing data, document management, accounting, communication, planning or monitoring activities. It all requires training and experienced people to operate it but the savings and increase in output tend to be huge.

Use of online services is also an area that is growing whether obtaining legal advice or processing litigation claims, accountancy services for instance to reconcile your accounts with your bank statements, using promotion and marketing platforms or myriad more services.

The use of flexible and zero hours contracts by some businesses to manage the peaks and troughs of work flow helps avoid paying for labour when it isn’t needed. This has an impact on gross profits and involves measuring productivity against variable costs.

Another area for investing in productivity is to review the need for managers and administrators. While they tend not to be directly related to the variable cost of production they are a direct cost and have an impact on net profits where measuring their productivity is against direct costs.

In addition to the focus on getting the right balance of labour and equipment, employee commitment is also key to productivity. Just look at the days lost to strike action by Southern Rail.

A motivated work force can have a huge impact on productivity. I am always impressed by the bin collectors who I now always see running between houses.

Training and investment in skills, rewards for performance, recognising personal needs for family support or career enhancement. listening to them and the working environment all add up to a workforce knowing they are valued and respected. It is unlikely to be all about how much they are paid although there are low pay thresholds where a lot of staff live from pay cheque to pay cheque such that a small amount of extra pay makes a huge difference. Whatever the means of motivation, it is all about respect for your people and how they feel valued.

The outlook for SMEs in 2018

outlook for SMEs in 2018As ever at this time of year, businesses are considering what the future holds for them in the coming year.

Save some outspoken Brexiteers, most “pundits” suggest the signs are not good.

The Chartered Management Institute (CMI) surveyed 1,000 managers across private, public and charitable sectors and found that optimism had steadily reduced from 63% in 2014 to 57% today with approaching one in four saying they were pessimistic about the coming 12 months. This at least is in positive territory but most such surveys reveal an optimistic bias.

The Institute of Chartered Accountants for England and Wales (ICAEW) based its predictions on the economy’s performance from October to December 2017.  On this basis, the organisation predicts GDP growth rising from 1.5% to 1.6% in 2018, with the weaker £Sterling post Brexit referendum continuing to help exporters.

However, the ICAEW warns that investment will remain weak amid the continuing uncertainty about the outcome of the Brexit negotiations, with the prospect of there being no deal adding to uncertainty and business risks.

The Confederation of British Industry (CBI) has also focused on Brexit uncertainty, calling for greater clarity, especially over the transition period, by the end of the first quarter of 2018.

CBI Director General Carolyn Fairbairn also said transforming the UK’s skills base and its infrastructure should be the highest priority for the coming year, particularly as the country continues to lose overseas workers and to attract fewer while the Brexit uncertainty remains.

So, what prospects does 2018 hold for SMEs?

It should be said that prediction is notoriously difficult because it cannot allow for the unexpected, which may be positive rather than negative.

This is why the Office for National Statistics (ONS) regularly revises its quarterly figures for some time even after a period has ended and it can be some time before the actual figures are revealed.

It is also the case that even in the most difficult of times, there will be opportunities as well as drawbacks. Especially for SMEs who are less exposed to macroeconomics than to entrepreneurial zeal.

SMEs are able to be more agile in responding to a potential or unexpected opportunity in a way that larger organisations cannot because the latter’s systems and hierarchies tend to be less flexible. This gives SMEs an edge in an uncertain and rapidly changing world.

I would argue that if an SME has robust monitoring systems in place for regularly reviewing its performance and revising both marketing and business plans in the light of new information, as suggested in my last blog on January 2, it is better placed to take advantage of opportunities as they develop.

So while the overall picture might appear bleak, SMEs can become the real powerhouse of the UK economy. They need to quickly and constantly weed out any parts of their operation that become a drag on the business and maintain tight control over cash flow, but now is a time to invest in the future, in both people and equipment to increase sales and improve quality and productivity

Clients and their business are out there, it is simply a matter of getting them to buy from you. Despite the pundits, the prospects for agile SMEs are good.

Annual review of your business and setting of growth plans?

growth plans?The festive break allows time for you to reflect on your business and review its performance over the previous year. It is also an opportunity to consider your growth plans for the coming year.

The discipline of writing down your plans and setting of budgets needs to be underpinned by measuring and monitoring performance as the basis for future planning.

The level of your review, whether strategic or tactical, will be defined by your objectives which might be for little change or dramatic transformation.

While the level of detail and research will differ, whatever the objectives the key information needed for a review are.

  • Last year’s plan and last year’s actual figures, details of your order book and future order prospects an up to date balance sheet.
  • Consideration of the different parts of your business that have been non-productive and those that act as a drain on resources that might be discontinued and those that have growth potential and should be the focus for the future. While this might seem subjective, it should be supported by evidence from historical figures and an observation of trends. Ideally it should involve market research before making any big decisions about major investment or a change of direction.
  • Consideration also should be given to resources available, options for growth, and this can be done by analysing your business’ strengths, weaknesses, opportunities and threats and preparing a SWOT matrix. The key is to use this as the basis of a ‘so what’ assessment of how to exploit strengths and opportunities and what to do about weaknesses and threats.
  • Consideration of your products and markets to identify those that yield the best margins, those that are good for cash flow and those that might require attention, whether increased margins, revised terms or cutting.

Your review should provide you with a clear picture of the business’ current situation and be used as the basis of future plans.

Setting of growth plans

Plans should be based on clear goals and objectives which need to be written down and agreed upon by everyone involved so there is no ambiguity about what is expected and so that they can be measured. A useful test of each goal is that they are ‘SMART’ where each should be based on the following criteria: Specific, Measurable, Attainable, Realistic, Timely.

While business plans might be prepared, all too many sit on the shelf unread for another year. Instead it is often more useful to use the review and SMART goals to produce financial forecasts of profit and loss, cash flow and ideally balance sheet. The more detail the better as they can be used for setting detailed budgets for expenditure and detailed sales by market or product. The detailed expenditure lines in a forecast can be used as key drivers of business performance whether investment in people, in marketing or in equipment. An example is to identify and have a separate line in the forecast for all the various marketing initiatives so that the results of each initiative can be measured and used as the basis for adjusting the marketing plan.

Detailed sales lines can be used to support the SMART goals so that performance can be measured against achieving targets.

The layout of the monthly management accounts should reflect the same line items as set out in the forecast so that once a detailed forecast has been set, such as for monthly sales and expenditure, it can be used to compare with the management accounts as a means of monitoring performance. In this way adjustments to the plan can be made where necessary.

Lenders are jeopardising businesses with their short-term thinking

It is often argued that banks’ and lenders’ impatience gets in the way of attempts to restructure and turn around businesses that might otherwise have a chance of survival.

This short-term thinking means that they are wary about agreeing to the use of Company Voluntary Arrangements (CVAs) to allow for the survival of insolvent businesses in a way that will benefit them as well as other stakeholders.

lenders short term thinkingClearly, banks and some creditors are dubious about the merits of CVAs, as in the current case of UK Toys R Us, whose creditors are due to vote on a proposed CVA this coming Thursday, December 21. If approved 26 stores will be closed and up to 800 employees made redundant. The rest of the business, however, will be saved and all creditors will be better off.

The Toys R Us situation is complex, and questions are being asked about the state of its pension fund, in particular by the Government’s Pensions Protection Fund (PPF) who are threatening to reject it, unless the company pays £9 million into the company pension fund. This might raise questions about preference, but I am sure the lawyers will deal with that. There are also questions about the tripling the remuneration for 2014 to 2016 for its former boss and an alleged waiver of loans to a company in the British Virgin Islands.

The other side of the argument is that CVAs allow businesses to implement plans for restructuring their finances and reorganising their operations to become viable without pressure from creditors. In turn CVAs result in fewer business collapsing and the preservation of more jobs.

This was the argument put by both the EU and the UK in 2016 in proposing the introduction of a three-month moratorium to allow insolvent companies to put together plans for restructuring as part of a review of current insolvency arrangements.

A similar argument was put earlier this month by Harold Tillman, former British Fashion Council chairman, when he called for US Chapter 11-style laws to give companies some breathing space.

The question is, would such protection result in both struggling and Zombie companies being restructured in a way that will benefit the economy?

What are the qualities and role of a leader in times of business crisis?

It is a rare business that will never face a crisis and it is estimated on average this is likely to happen every four or five years.

Aside from unexpected events, such as natural disasters, a crisis be anything from a financial problem to a massive data hack, to potential reputational damage arising from inept handling of customers or stakeholders or even a product liability issue.

Effective handling of the crisis situation is crucial to the company’s reputation and in some instances to its very survival.

While those affected by the crisis will most likely look to to directors and managers for guidance, they are unlikely to be effective without leadership and clear messages from their CEO personally.

How should leaders manage a business crisis?

eadership in a business crisisWhile it is important to have appropriate systems and procedures in place for crisis management leaders can only be effective if there is a clear strategy based on a careful assessment of the situation. Often this requires scenario planning well ahead of any crisis so that early action can be taken.

The directors and managers will not be speaking with a unified voice unless they are given clear direction by their CEO.

The CEO should set the tone, and this may include acknowledging that mistakes have been made along with clear guidance on what statements can be made publicly about what the business is doing to address the situation.

So, the first step is for the CEO to ensure that the directors and managers are delivering the right message.

To do this, a crisis management team is needed, one with situation specific skills to deal with the crisis and with the communication skills to get the CEO’s messages out to all stakeholders.

Empathy without emotion will help deal with those affected when people are scared and key people need to be involved so that decisions are made and implemented while at the same time acknowledging the fear and pain among those who are affected.

The CEO should remain positive and reassuring, dampening any understandable urge to resolve the situation immediately, which is not always possible. The steps that need to be taken should be understood and wherever possible communicated to all those affected as well as to those responsible for dealing with the crisis.

An effective leader needs to be both self-aware and have a large measure of self-control.

They will need to demonstrate an understanding of others’ feelings while at the same time remaining clear-headed and focused on dealing with the crisis. This will mean fostering teamwork to minimise conflicts among crisis team members, internal staff and external stakeholders and ensure everyone stays on track during the process of handling and overcoming the crisis.

The objectives of any crisis management project are normally to minimise disruption and minimise reputational damage with the aim of restoring normal operations as quickly as possible. However all too often a focus on minimising costs and apportioning blame gets in the way and leads to a consequential fall out and a long-term damage to reputation.

Leaders take tough decisions which sometimes will need investment of time and money in resolving a crisis rather than running scared themselves.