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Banks, Lenders & Investors Finance HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Voluntary Arrangements - CVAs

Proposed HMRC preferential status a blow to financing and restructuring

HMRC preferential status could cause more CVA failures The Government last week published its new draft Finance Bill, which includes the proposal to restore HMRC preferential status as a creditor for distribution in insolvency. This was originally granted in the Insolvency Act 1986 but removed by the Enterprise Act 2002.
In summary, HMRC is currently an unsecured creditor ranking equally with suppliers as trade creditors and unsecured lenders for any pay-out to creditors from an insolvent company. The preference would mean they get paid ahead of unsecured creditors leaving less or nothing for most creditors whose support is necessary when restructuring a company.
There had already been considerable consternation expressed by insolvency practitioners and investors after Chancellor Philip Hammond announced the proposal in the Spring, but it seems the Government has decided to press on making only a light amendment to the effect that preferential status will not apply to insolvency proceedings commenced before 6 April 2020.
The change in HMRC to preferential status will apply to VAT and PAYE including taxes or amounts due to HMRC paid by employees or customers through a deduction by the business for example from wages or prices charged such as PAYE (including student loan repayments), Employee NICs and Construction Industry Scheme deductions.
It will remain an unsecured creditor for other taxes such as corporation tax and employer NIC contributions.
The consultation period for the Bill ends on 5 September 2019 and, not surprisingly, there have already been criticisms of the HMRC preferential status element of the bill, not least as reported in the National Law Review:
“Unfortunately for businesses and lenders, this does not address real concern about the impact of this change on existing facilities and future lending,” it says.
It points out that preferential debts are paid after fixed charges and the expenses of the insolvency but before those lenders holding floating charges and all other unsecured creditors.
Accountancy Age also reports on reactions from the Insolvency trade body R3’s president Duncan Swift, who described the Bill’s publication as “shooting first and asking questions later”.
He said: “This increases the risks of trading, lending and investing, and could harm access to finance, especially for SMEs. This means less money is available to fund business growth and business rescue, and, in the long term, could mean less tax income for HMRC from rescued or growing businesses. It’s a self-defeating policy.”
The article also includes comments from Andrew Tate, partner and head of restructuring at Kreston Reeves: “The introduction of this in April 2020 will be interesting,” said Kreston Reeves’ Tate. “The banks will have to change the criteria on which they base their lending to businesses in the light of this new threat, but will they also reassess the amounts they have lent to existing customers?

Is HMRC preferential status the death knell for CVAs?

CVAs (Company Voluntary Arrangements) have traditionally been the route whereby unsecured creditors could have some say, and receive an enhanced pay-out, when a business becomes insolvent and seeks to restructure its balance sheet in order to carry on trading and manage its debts.
Instigated by the directors, approval of a CVA requires 75% of unsecured creditors where the payment terms are binding on any dissenting creditors providing they are less than 25%. Generally, the earlier a business enters a CVA the better, although they can be used as a means of dealing with a minority creditor who has lodged a Winding Up Petition (WUP) in the courts.
CVAs generally involve a payment to creditors which must be distributed by creditor ranking where currently HMRC gets paid the same as trade creditors but under the proposals HMRC will be paid first, leaving considerably less for trade creditors whose support is needed as ongoing suppliers.
CVAs have been a valuable insolvency tool for saving struggling retailers, most recently Monsoon/Accessories, Arcadia (owned by Philip Green) and earlier Debenhams, Mothercare, Carpetright and New Look.
But there have been signs of creditors’ disenchantment with the CVA mechanism when used for retail chains, notably from landlords, who stand to lose significant revenue if they agree to reduce their rents as part of the CVA agreement.
Arcadia, in particular, struggled to reach agreement when landlord Intu, owner of several large shopping arcades, said it was not prepared to accept rent cuts averaging 40% across Arcadia Group shops in its centres. In the end the deal was agreed after landlords were promised a share of the profits during the CVA period. This is an example of the flexibility of CVAs and of how they can benefit creditors if a business is to be saved.
It is a dilemma for landlords in particular, but on the whole they seem to have come to the view that some revenue going forwards is better than none, given that there is reducing demand for High Street Retail space not least because of the sky-high business rates and dwindling footfall from shoppers.
However, it is very likely, in my view, that this latest move by the Government to restore HMRC preferential status, could just tip the balance in making the CVA ineffective as a restructuring tool since the lion’s share of available money will be paid to HMRC.

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Accounting & Bookkeeping Cash Flow & Forecasting Debt Collection & Credit Management Finance

Fine words are not enough to enforce the Prompt Payment Code

Prompt Payment Code: late payment penalty?Last week saw two announcements on the ongoing issue of late payments by large companies to SMEs, both described as measures to end the problem.
The first announced the appointment of Paul Uppal, Small Business Commissioner, to the Prompt Payment Code’s Compliance Board alongside a promise from business secretary Greg Clark to strengthen the voluntary Prompt Payment Code.
The second, by Small Business Minister Kelly Tolhurst, was a call to submit evidence to help the Government to identify “the most effective way possible to tackle this issue once and for all”. The deadline for submissions is November 29 and you can find out more here. Her press release states: “Nearly a quarter of UK businesses report that late payments are a threat to their survival.”
According to the Times, Mr Clark had also promised that 90% of undisputed invoices from SMEs on Government contracts would be paid within five days. He also floated a proposal to make company boards appoint Non-Executive Directors with responsibility for supply chain practice.
In view of the IoD’s (Institute of Directors’) estimate that late payments put 50,000 SMEs a year out of business, I make no apology for revisiting this appalling situation for a fourth time this year, following my previous blogs on April 12, June 28 and a Stop Press on September 25 in which I mentioned a Times report that Mr Uppal had helped just nine SMEs with complaints since his appointment in December last year.
New research from Hitachi Capital, reported in Credit Connect, has also revealed that 17% of business owners say they are forgoing paying themselves a wage so they can pay their staff on time. This rises to 27% of small businesses that say they are already struggling to survive.

The history of action on late payment and the Prompt Payment Code

The Small Business, Enterprise and Employment Act 2015 made it mandatory for larger businesses (those with more than 250 employees or £36 million in annual turnover) to report their payment practices and performance on a half-yearly basis.
Non-compliance is a criminal offence, subject to prosecution. Yet since it came into force in April 2017 only 2,000 of the 15,000 businesses required to comply have submitted reports, and of these, some of the information has been inadequate. Despite the criminal aspects of non-compliance by 13,000 businesses, there have been no reported prosecutions.
In December 2017 Mr Uppal was appointed Small Business Commissioner with a brief, to support (my italics) SMEs in taking action on late payments and on making a complaint.
It was just a month or so later that Carillion, a known late payment offender and a signatory to the voluntary Prompt Payment Code, went bust and three months on from Mr Uppal’s appointment, as I reported, a survey by Close Brothers Invoice Finance found that 84% of those SMEs asked had little confidence that the appointment would have a positive impact on their businesses. It would appear that Boris Johnson’s two-word comment about business was prophetic.

Action that should be taken on late payment and the Prompt Payment Code

Perhaps I am being cynical but the latest Government announcements were made during the Conservative Party conference – no doubt to garner positive headlines in view of the general cynicism about the Government’s understanding of SMEs problems, especially given that businesses are becoming more public about the ongoing Brexit negotiations?  Time will tell.
As one commentator, Greg Carter, founder and chief executive of Growth Street, said in CityAM “At present, the Prompt Payment Code … dictates that invoices should be paid within 60 days, other than in ‘exceptional circumstances’. We’ve all seen now that these voluntary stipulations are worth little more than the paper they’re written on.”
He added “But no matter how energetic and effective the small business commissioner is, he must be supported with a robust, meaningful, and (crucially) enforceable code.”
This, surely, is the point. For SMEs to see any meaningful improvement in payment times, there must be a sufficiently strong set of penalties that are actually imposed to ensure businesses comply. As Mr Carter says in the article action needs to follow rhetoric. Failure to police the Small Business, Enterprise and Employment Act 2015 says it all.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance Turnaround

K2 Key Indicator: is the UK construction industry in terminal decline?

construction industry at workThere is no doubt that the UK’s construction industry is facing a number of pressures including a lack of funding, inadequate planning approval processes and a severe skills shortage.
In this first of a monthly Key Indicator series that looks at major industries and their future, this month I look at the construction industry.
In the November 2017 Budget, the Government set a target to build 300,000 new homes per year to address the country’s chronic housing shortage. This has been estimated by the lender Urban Exposure as requiring £20 billion-plus of new funding.
In January this year, the Government launched a new national housing agency, Homes England, in order to help achieve this target. Its aim is to bring together existing planning expertise and new land buying powers.

Financing new housing development

There is a distinction to be made between the smaller house-building companies (those building 100-150 homes per year) and the relatively small number of large concerns.
Despite the controversial profits made by some larger house builders from the Help-to-Buy scheme, the House Builders Federation (HBF) estimated that between 2007 and 2009 after the 2008 Financial Crash one third of smaller companies stopped building homes. This equated to a loss of 25,000 homes per year being built.
Since then, of course, a combination of massive losses post-2008, consequent risk aversion and the tighter Basel 3 regulations on bank lending to what are termed High-Volatility Commercial Real Estate Loans (HVCRE Loans) has made borrowing by developers much more difficult.  Basel 3 means that banks are now required to set aside 18% of capital as a buffer for these loans compared to buy to let property loans of just 4%.
Consequently, lending to developers by the big banks, particularly to the smaller construction companies, who cannot access the bond markets direct, has plummeted. In 2016, CityAM reported that UK banks had halved their lending to property developers, down from £32.5bn in April 2014 to £14.9bn in April 2016.
The lending policies are clearly daft given that Loan-To-Value (LTV) on development property is typically 60% whereas the LTV on buy-to-let can be 95%
This has led to the growth of specialist property lenders such as Shawcross, Close Brothers and Paragon, the first two of which won top awards in this year’s online publication Moneyfacts awards. None of these specialist lenders has incurred any losses for some years which begs the question about the banks’ understanding of the market.
As yet, however, these specialist lenders, along with newer entrants such as HCA, Titlestone and Urban exposure, have not filled the funding gap.
In the meantime, according to a Reuters report on a survey mid-2017, the directors of small British construction businesses have been plugging the funding gap with their own resources but this has been limited and not at the amounts required, hence a significant scaling back by small builders.
Still, UK Finance reported in February 2018 that while, manufacturers’ borrowing had expanded slightly, the construction and property-related sectors had contracted.
Meanwhile despite the 300,000 target and the new Government agency, the Government continues to push its Help-to-Buy scheme that has improved the profits for larger firms by pushing up house prices due to limited supply.

The construction industry, planning, Brexit and the skills shortage

It would be impossible to fairly assess the future of the UK construction industry without considering planning, Brexit and the industry’s skills shortage. I make no apologies for calling it a crisis, not least because that is what the Federation of Master Builders (FMB) called it earlier this year.
This was after its quarterly survey into skills revealed that companies are particularly struggling to recruit bricklayers and carpenters, but that demand for skilled plumbers, electricians and plasterers is also outstripping supply.
This is also pushing up wages, thus adding to the costs being borne particularly by the smaller businesses many of which are losing staff to larger firms.
It has been estimated that one in five construction workers in the housebuilding sectors is foreign-born with 17.7% from EU countries. Across the country, Romania is by far the most common country of origin, followed by Poland, Lithuania and Ireland.
There has been plenty of evidence that EU nationals including construction workers have been leaving the UK in large numbers, while fewer have been coming since the June 2016 decision to leave the EU.
A combination of rising hostility towards migrant workers, the tediously lengthy and uncertain process of agreeing the status of migrant labour during the Brexit negotiations and more recently the revelations by the Home Office of a “hostile environment” for immigrants despite them having lived and worked in the UK for years are not helping the UK plug its construction skills gap.
Planning consent has been for some time an issue causing delay by depleted departments drowning in applications and appeals. This along with the system of local and regional planning committees staffed by inexperienced councillors dealing with NIMBY local inhabitants and the lack of local and regional frameworks to identify land for housebuilding are all contributing to a sclerosis in the planning system.
Myopia and an absence of joined-up thinking seem, sadly, to have been the characteristic features of Governments for some time and despite the rhetoric it continues, which bodes ill for the future of the construction industry.
I am not however yet willing to drive the final nail into the industry coffin.  There is a chorus of voices from many sectors of UK industry warning against the foolishness that characterises much of the Brexit negotiating stance, and the volume of noise is rising as the consequences emerge.
Being an optimist, I hope that they will be listened to and sanity will prevail before it is too late.

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Accounting & Bookkeeping Cash Flow & Forecasting Debt Collection & Credit Management Finance

Can SMEs have confidence in the Government’s new Small Business Commissioner?

mall business commissioner a superhero?In December 2017 the UK Government appointed a Small Business Commissioner with the remit of supporting SMEs struggling with late and unfair payment practices when dealing with larger businesses.
The Commissioner appointed to tackle this is Paul Uppal, who ran his own small business for 20 years, and it will be his job to support SMEs in taking action on late payments and on making a complaint.  There is also a website where SMEs can get help.
Three months after his appointment, however, research by Close Brothers Invoice Finance found that very few SMEs have any confidence that the Commissioner will be able to make a difference. Their report says: “84% of SMEs do not anticipate that the introduction of the small business commissioner will have any positive impact on their business.”
According to Mike Cherry, National Chairman of the Federation of Small Businesses (FSB): “The UK is gripped by a poor payments crisis, over 30% of payments to small businesses are late and the average value of each payment is £6,142. This not only impacts on the small business and the owner, it is damaging the wider economy.”
It has been estimated by the Centre for Economic and Business Research that a group of 22,000 so-called high growth small businesses make a disproportionately large contribution to the economy, providing an estimated £65,000 per worker compared to the national average of £55,000.
However, while very high on the list, ‘late payment’ was not SMEs’ only concern when asked about their issues and prospects for 2018.
According to a survey by chiefexecutive.com, high on the SME list of challenges were firstly recruiting, retaining and developing quality people, followed by managing growth and change (specifically access to and cost of funding) and the Government’s competence, regulation and understanding of business.
In fourth place was managing uncertainty (the wider geo-political and economic context). Other research has found that more than half of SMEs felt that their Brexit concerns were being ignored and that ministers were not listening to their views.
Given that SMEs are seen as the key to improving the UK economy’s growth and productivity plainly they will need as much support as possible.
As the deadline for leaving the EU is less than a year away it is high time that there was serious attention paid to SME voices and that significant and effective steps taken to address them.
The Small Business Commissioner appointment is a start, but he might also take up other causes for small businesses, not least holding banks to account for their dealings with SMEs. There is the prospect of a complaints procedure that avoids the need to deal with issues through the courts. There is also the creeping nature of fees and charges which go unreported in the press, the latest being Lloyds revised fees that for some have in interest rates being increased up to 52% and fees being increased by 240%.
it remains to be seen how effective the new Commissioner will be.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance

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.
 

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Banks, Lenders & Investors Business Development & Marketing Cash Flow & Forecasting Finance

How will SMEs finance their future growth plans?

It has been estimated that UK SMEs account for more than half of employment and national income, so their importance to the economy is significant.
They have advantages over larger businesses in their ability to be agile, flexible and quicker to innovate and, of course, successful SMEs have the potential to develop into the larger businesses of the future.
However, there is one area where SMEs have struggled and that is in obtaining finance for growth.
There are various views on why SMEs struggle to obtain finance, including a very conservative attitude by banks with little appetite for risk, lack of a sufficient track record, being too small to attract investors and lack of sufficient tangible assets to offer as security.

A future growth finance “black hole” after Brexit?

funding black hole in £SterlingAccording to research carried out on behalf of the FSB (Federation of Small Businesses) and published in early May 2017 this is a situation that may get worse after 2020.
The EU has earmarked approximately £3.6 billion for UK regional development funds until 2020.  The money is designed “to help correct regional imbalances” according to an article in uk.businessinsider.com.
Another key area of SME funding is R&D Tax Credits, these have become a huge source of finance for those businesses that are investing in the future but this money comes from the EU, not UK.
So what will happen once the process of the UK’s leaving the EU is complete? Will a cash strapped UK replace the EU funds?
The independent research company Verve surveyed 1,659 FSB members between 5 – 16 December 2016. FSB also carried out a series of interviews and focus groups with members across the UK.
According to the results: “eight in ten (78%) small firms have sought business support services over the last 12 months. Those in Yorkshire (25%), the North East (22%) and North West (18%) were most likely to submit applications for EU-funded schemes.
Of those that have applied for such schemes, the majority believe EU funding has had a positive impact on their business (68%) and local area (64%).”
These findings prompted FSB National Chairman Mike Cherry to warn that “Small businesses across the country are staring into a business support black hole from 2021.”
He called for the setting up of a single Growth Fund for England to be in place before the negotiations are completed plus funding to support future growth hubs.
K2 Partners has produced a guide to sources of finance, which can be downloaded here

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Accounting & Bookkeeping Cash Flow & Forecasting Finance General

How does the recent business rate revaluation affect you?

business rate revaluation up or down?It has been a long time since business rates were last revalued, but finally the Government’s Valuation Office published draft new rates on September 30, 2016.
They will come into effect from April 2017, leaving a window for businesses to challenge or appeal their new assessment.
In some cases, it was anticipated that small businesses would see a reduction in their charges because they have been based on 2008 valuations and in some cases businesses will be eligible for transitional relief.
Changes announced in March 2016 mean that small businesses with a rateable value (RV) of below £12,000 will be exempt from payment.

Check your business rate revaluation

Businesses can check their new draft business rates online, but the following are some examples:
In Ipswich, a street close to the town centre containing a mix of restaurants and small, independent retailers, one small retail unit of 100 square metres was RV £5,100 (2005), £7,200 (2010) and the draft RV for 2017 is £9,600.
In a small retail mall in Harwood Road, Fulham, London a small retail unit of 54.6 square metres was RV £16,750 (2005), £17,500 (2010) and has remained unchanged in the latest valuation.
By contrast, a large retail unit of 12,754 square metres in Oxford Street, Westminster, London, has jumped from RV £3,630,000 (2010) to draft RV £5,850,000 in 2017.
There is some suggestion that the valuations have been adjusted to allow for a fairer system for smaller businesses taking into account some years of over payment since 2008.
The chairman of the Federation of Small Businesses (FSB) Mike Cherry last week welcomed the review, especially the possibility of relief for some small businesses, but has also called for more frequent revaluations because there will have been a “big jump between the old valuation and the new one”.
The Local Government Minister, Marcus Jones, said “as we make the system fairer up and down the country, nearly three quarters of companies will see no change, or even a fall in their bills, including 600,000 who from next April will have their bills cut altogether”.
We would urge all businesses to check their new valuation online and to share your views on the impact it will have on your business.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance General

Have you ever considered a payment card based on gold?

Continuing our series of blogs about new business ideas for business people to ponder during the summer holiday break we have a guest contribution from Alasdair Macleod, Head of Research at GoldMoney, a leading provider of precious metals for investors. They recently launched a pre-loaded payment card using gold as a digital currency based on the unit value of gold bullion as an alternative payment method.

How GoldMoney’s preloaded card works

By Alasdair Macleod
Gold card and coinsAt GoldMoney, we have noticed that account-holders sell gold to preload their cards when gold rises. This makes sense. People are using their accounts as money, which is exactly what they should be doing.
A Gold backed card compliments a conventional debit or credit card based on fiat currency as it gives users the option of using it for day-to-day payments, as well as taking advantage of currency fluctuations.
Let’s assume you plan to take someone out to dinner. Beforehand, you look at the price of gold. If it is up, measured in your normal currency, preloading your card in order to pay for your dinner will make it less costly than using your normal bank card, compared with yesterday. If the gold price is down, you just use your bank card. In other words, you use the money that gives you the best deal.
This is the point about money. It is not an investment, so computing what you initially paid for gold and your profit or loss on it is not the point. You have to look at it as a competing form of money, which can give you an economic benefit.
As a user myself, I am certainly benefiting from this dual-money approach to spending.
My experience of gold versus sterling is a good illustration of why it works so well.
About four months ago, I planned a trip to Canada, which, it so happened, was to be at the same time as the British referendum on leaving the EU. I paid for the flights, hotels and car hire several months ahead. That left the issue of spending money, about which I did nothing, other than to ensure I had adequate funds in both my GoldMoney and regular bank accounts.
Before the vote, sterling was strong, which impacted negatively on the purchasing power of gold measured in sterling, so I drew down on my regular bank debit card to pay for local expenses in Canada. Then came the surprise vote for Brexit, and the gold price, measured in sterling, took off like a scalded cat.
The sterling rate for Canadian dollars was also trashed, but I still had my gold, which actually bought significantly more than before, even measured in Canadian dollars. From that time, I used my GoldMoney card for local expenses. So instead of worrying about the collapse in sterling, I continued to enjoy my stay in Canada by using gold.
I could, of course, have taken out a travel company’s pre-loaded card, and bought my Canadian dollars well in advance. By locking in the rate, I would have had the advantage of certainty, but lost the flexibility gained by using gold as a rival form of money. In the event, I was far better off retaining that flexibility.
I share this experience with my readers as a lesson for us all.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance Rescue, Restructuring & Recovery Turnaround

Would leaving the EU affect businesses’ access to capital?

EU referendum jugsaw pieces
To a large extent what will happen to access to capital should Britain vote to leave the EU will be determined by the perception and subsequent behaviour of three key players: the ratings agencies, such as Moody’s; the financial institutions, such as the banks; and investors.
In March Moody’s warned that the economic costs of leaving would outweigh the benefits and may put the UK’s Aa1 credit rating at risk. The agency believes that the value of debt would be likely to reduce because of a belief that debt would be less likely to be paid although it does not believe an exit would have much effect on the credit rating of banks.
It also suggested that it was “highly unlikely” the UK’s existing arrangements with the EU in areas such as trade would be “replicated in full”.

What might be the effects on lending and investing?

Business capital illustrationThe willingness of banks to lend is also likely to be affected by a Brexit, in my view.
I would argue that foreign banks would be less likely to lend in UK, a logical consequence of what Moody’s has been suggesting.  Given that UK banks are still not generally lending to small business this combination would suggest there will be much more reliance on alternative forms of funding, and that there will less funding available.
The third key set of players is investors. While it is rational for investors to wish to protect and increase their returns, for some time now they have focused on short term gains and “safe” or asset underwritten investments which accounts for the current high values of both gold and property. The question is whether the UK leaving the EU would increase their anxiety levels and push them further into safe investments. This would make it much harder for both UK manufacturing and service sectors to get access to capital.
A final consideration is that the EU treaty would continue for two years following a vote to leave and the Government would have to trigger a particular clause, Article 50, to push ahead with disengagement. I believe that the likely consequence of this would be a rise in the cost of capital and that both lenders and investors will become more cautious, certainly until they have more confidence about the future.

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Banks, Lenders & Investors Business Development & Marketing Cash Flow & Forecasting Finance General Turnaround

Now the election is out of the way, what are your business priorities?

Before the election last week, the main business worries were the lack of orders due to uncertainty, and the lack of finance for small businesses.
Almost as soon as the results were in, John Longworth, the Director General of the British Chambers of Commerce, among others was calling for “bold, ambitious” action from the newly-formed government.
His open letter to the Government asked for an emphasis on growth, not austerity and on measures to help businesses to export.
Meanwhile, the Daily Telegraph’s Matthew Lynn identified four business priorities that the government needs to address with some dispatch to help businesses and economic growth.
They are reducing both capital gains and top rate income tax, actually delivering on promises to remove red tape (partly by renegotiating some of the EU regulations affecting businesses), helping entrepreneurs by exempting them from some employment and capital gains regulations for their first five years in business and by recognising that the property market is broken.
While the election has introduced a level of certainty, the uncertainty about an in/out EU referendum remains and time will tell if government initiatives stimulate investment since the EU regulations on banks will discourage risky lending which for most UK banks means lending to SMEs.
We invite you to tell us what measures would most help your business to grow, and also what you think the Government should do to support them.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance General Insolvency Rescue, Restructuring & Recovery Turnaround

Is it time to accept some responsibility for our own behaviour?

As we emerge from the 2008 Great Recession, is it time to reflect on the broader values and behaviours that contributed to the hubris and subsequent crash?
Much of the focus to date has been on blaming others and in particular bank bashing. We have cheered from the sidelines or simply remained silent over attempts at regulating and curbing remuneration for bankers and CEOs. The aggrieved have engaged with the various inquiries into the conduct of banks and other financial institutions.
This all underpins our desire to blame someone else.
It continues, like the recent call by ResPublica think tank for bankers to be made to swear an oath to fulfil both a moral as well as an economic purpose. Presumably this is envisaged as the equivalent of the oath to which doctors sign up. While the Hippocratic Oath may on the whole work to prevent misconduct in the medical profession, applying it to bankers comes across as our continued belief that we bear no blame.
We implicitly know that legislating for moral or ethical responsibility for bankers will be almost impossible to enforce and will only end up with more clauses in contracts where we confirm we have taken independent advice.
For too long there has been an unspoken assumption that our values are different from those of bankers or CEOs. It is time for us all to take responsibility for borrowing more that we could afford, for believing that getting rich is easy and without risk, for contributing to the hubris.
Only when we accept some responsibility for our own behaviour can we change the values that contributed to the Great Recession.

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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 Insolvency Rescue, Restructuring & Recovery Turnaround

Is another bank mis-selling scandal brewing?

 

The full extent of the banks’ questionable behaviour following the 2008 crash has seemingly not yet played out as suggestions of yet another possible mis-selling activity surface.

Many SMEs are still awaiting compensation after being mis-sold insurance in the form of hedging products to protect them from potential interest rate rises.  Libor rate rigging is still under investigation and the recently-published Tomlinson report has prompted Business Secretary Vince Cable to refer RBS’ approach to dealing with companies in financial difficulty for investigation by the Financial Conduct Authority and the Prudential Regulation Authority.

Mr Cable is plainly going to be an even busier man following recent revelations in the Sunday Mail, the FT and the Times, that banks may also have been taking advantage of the Government’s five year-old Enterprise Finance Guarantee (EFG) scheme whereby they may have sought to repair their balance sheets at their SME clients’ expense.

Reportedly some SMEs have had their overdrafts cancelled by their banks who have then offered loans under the EFG scheme. The benefit for banks is that EFG loans do not require the same level of reserve capital as overdrafts but it is not clear whether this was the reason behind the withdrawal of overdrafts.

It seems that many banks have not fully explained the terms of an EFG loan.  Loans under the EFG scheme are intended for businesses that do not have sufficient assets or track record for a conventional loan where the scheme guarantees the bank 75% of any loans should the borrower’s business fail.

Unfortunately, many SMEs appear to have been given the idea that should they fail they would only be liable for repayment of 25% of the outstanding debt.  In fact they are liable for the full amount and the banks get the 75% from the Government ONLY after they have exhausted the recovery terms of the EFG loan which require security over the business assets and personal guarantees from director/shareholders. As such the government only pays out under the scheme after the company is formally declared insolvent and the guarantors are made bankrupt.

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

Economic recovery and funding growth

A recent survey by the FSB reported that 47% of its members had been refused loans in the last three months to September and 56% felt that banks did not care about SMEs.
At the same time, 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.
And, banks are still facing an estimated £10 billion in potential payouts to businesses mis-sold interest rate protection and hedging products.
No wonder that banks aren’t lending to SMEs.
In the meantime large business are estimated to be sitting on £700 million of cash reserves in readiness for funding development and growth.
What are small businesses supposed to do?
Firstly, there are other sources of finance besides the banks and K2 has a free, comprehensive guide to the options. You can find it at http://www.k2finance.co.uk
Secondly, and more importantly given the prospect of over trading as the recovery gathers pace, now is the time to ensure that the business model is right to fund growth and avoid running out of cash.
Advice from restructuring professionals is not exclusive to when a company is insolvent.  Their experience and solutions can also be used to help SMEs grow.

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Business Development & Marketing General Insolvency Rescue, Restructuring & Recovery Turnaround

Turning around SMEs for growth

Signs of an economic recovery seem to be feeding through into increased confidence among chief financial officers of some of the UK’s largest companies, according to the latest quarterly survey from Deloitte, which has put the appetite for risk at a six-year high.
The findings, reported in Monday’s business section of the Telegraph, found that 54% of financial officers believed it was a good time to take risk onto their companies’ balance sheets.
This is all well and good, given that many of these companies have been sitting on an estimated stash of £700 billion in cash, but what about the SME sector?
There has been no sign of any improvement in lending to this sector as we have heard repeatedly in recent weeks, yet they are seen as essential to a sustained economic recovery.
So what can they do if they don’t have either the reserves or the borrowing capability to take to take advantage of the signs of recovery?
Many SMEs have been hanging on, managing cash flow and paying down debt wherever possible but if they are to grow they need to make sure they are in the best possible shape and this may be exactly the time when a restructuring expert should be called in to take a thorough look at their business model and whether it is possible to free up some of the cash currently going to creditors.
Quick, skilled teamwork by turnaround professionals does not have to be used only when a company is insolvent.  The techniques can also be used to put SMEs into the best position to plan for growth. But they need a consensual approach involving all stakeholders as we say in this article in the Turnaround Supplement just published by the Daily Telegraph here.

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

Growth will not come from betting on certainties

Financially speaking we are living in a risk averse world post 2008.
This may be understandable but in a globally connected and highly competitive world UK businesses need to innovate if they want to survive and prosper.
It’s a point that British inventor Trevor Baylis OBE, inventor of the wind-up radio in the early 90s, emphasises in calling for the importance of innovation and invention to be taught in schools in an interview with the Daily Telegraph.
Invention is also in the spotlight this week with the announcement by the Institution of Engineering and Technology’s 2013 winner of the annual Faraday Award. The winner was Sir Michael Pepper, a professor of nanoelectronics at UCL whose work has pioneered development of an unhackable computer.
Other IET medallists are in the fields of supercomputing and research in bio-inspired technology that could lead to the first artificial pancreas.
All this takes money and commitment, and while there is some evidence from an analysis of company tax receipts by national accountants UHY Hacker Young showing that investment in R & D in 2012 was 8% higher than in 2011 thanks to increased tax relief on research spending it is still less than 2% of economic output.
But how many SMEs are likely to be able to take advantage of this or have the resources to put into development and innovation when they are still facing an uphill struggle to raise finance from banks unwilling to lend to them?
Indeed banks like most of the lenders coming into the market to replace them, want security over assets which does not allow for innovation.
Many are unaware of other sources of finance and K2 has a comprehensive, free, downloadable guide to sources of business finance available at http://www.k2finance.co.uk

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

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!

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Banks, Lenders & Investors Debt Collection & Credit Management General Personal Guarantees Rescue, Restructuring & Recovery

Should Governments try to help businesses or leave us alone?

Governments are an easy target for blame when life is difficult for businesses.
The previous UK incumbents were accused of exacerbating the conditions that led to the 2008 global economic meltdown, while the current regime’s efforts to improve conditions for business have hardly won high praise.
No business can exist in a vacuum and all benefit from so-called “public goods” such as infrastructure and the education system, but recently John Timpson, chief executive of Timpson the family-run shoe chain, was quoted as saying that the best way government can help businesses is to leave them alone.
Certainly various government initiatives, such as stimulating bank lending to SMEs, have been a resounding failure.  For example, the Enterprise Finance Guarantee Scheme only pays out when the banks have exhausted all other forms of security, including directors’ personal guarantees. Not surprisingly the scheme has failed to attract many takers.
Calls for a review of business rates have fallen on deaf ears and tinkering with the planning regulations in a bid to help revive faltering High Streets has so far yielded no noticeable results. The new Help to Buy scheme designed to stimulate house building and revive the construction industry brought forth dire predictions of a potential new housing bubble.
It’s clear that these days few politicians have significant experience of the world outside of Westminster so is John Timpson right?  Tell us what you think.