So that was it then? The worst recession in modern times is over quick as a flash and now all seems to be honky dory again. Certainly in the UK we are hearing reports of month on month house price rises and that “money is beginning to flow” again. What I don’t understand is why people consider this a good thing? Isn’t over inflated house prices and the “money flowing” the whole reason why things took a turn for the worse?
Perhaps most puzzling to me is the matter of small businesses. My understanding is a little like this:-
1. Banks are run on bonus culture – encouraging irresponsible lending
2. Banks lend out more money than people/businesses can afford
3. People/businesses can’t afford to pay back what they borrow
4. Banks right off debt, huge shit storm ensues
Because of this the banks have been told that they must now be much stricter with their lending. But but but…on the other hand they are being told that they must increase their lending. So they need to increase their responsible lending then? Certainly when it comes to business loans the banks are getting huge amounts of stick from small businesses that want to borrow money to tide them over during the recession? So you want banks to lend money to small businesses that are fearing the worst during the recession? Is nobody else’s spidey sense going of here, how the hell does that fit in with responsible lending*.
“Dear Mr Bank Manager, my business has been in the crapper ever since the recession started but if you could just lend me some money to keep me going for another 6 months then I MAY be able to pay you back some time. ps if not just add me on to that bad debt list you have”
In my mind being in debt and being responsible just don’t go hand in hand unless it’s exceptional circumstances. The responsible small business owner should be looking at how to be more efficient, not to the banks for money. Any business person with half a brain has the rainy day fund don’t they? If it doesn’t work out during a recession then I’m very sorry but that’s just life, retrain, do something else. I just can’t get my head around this whole going under as soon as the credit stops flowing thing. If you need to borrow money on a month to month basis to operate then you have cash flow problems, sort them out. Get payment up front, perform credit checks on potential customers, be more pro active in chasing payment etc Either that or your business simply isn’t profitable.
I know this sounds like I’m preaching here but it annoys the living hell out of me. I have a 13 year old daughter who is going to be saddled with government debt for her whole working life. This is just another of those facts of life. But what I would HOPE is that during that time she will also get to enjoy a career (whatever it may be) in a business built on solid foundations and growth, not on month to month bank loans. Recessions are all about survival of the fittest but in our new modern namby pamby PC world we’re just not prepared to let it ride out. The economy would find a natural level from which to start growing, as would house prices. We can’t wait for the slow turn around and slow growth built on solid business fundamentals, we want it all better, right now. In essence we want to borrow money to cover our existing debt. And because of this I honestly just think we’re delaying for recession mk2, not only will my daughter be paying of our generations mistakes with her increased taxes for her whole life but she’ll also have the pleasure of having to weather the real recession that we seem determined to put back for our kids. This pisses me off.
*Yep I appreciate the irony of the banks having to borrow money to survive themselves. The trouble is that unlike most businesses we’ve made them a necessary part of modern life (How many of us get paid in cash these days?). The fact is as well that until the UK Government started pressuring them into lending again it looked as though they may have just about learnt their lesson.
6 Responses to “Small Business And The Credit Crunch (UK Edition)”
Thai
August 5, 2009
I agree with your statement above but I have an example of how a good business can still need money from the bank. I have a client who sells tires. His suppliers will give him a 10 percent discount if he pays for his inventory before x amount of time. This hopefully promotes him to sell the inventory that the tire provider loaned to him without cost until the customer pays. At that time if he is within the time, he’ll get the discount along with his usual cut. If he goes to the bank and borrows the amount needed to pay off his inventory BEFORE a client buys a tire, he’ll get his cut AND the 10 percent. He’ll only need to pay the bank 6 percent here locally for the load.
|.-= Thai´s last blog ..One of the Smallest and Fastest pdf reader SumatraPDF =-.
Paul B
August 5, 2009
But why can’t he buy the tyres early from the profit he made on selling the previous batch? Can you see what I mean? Unless you’re spending everything you make (bas business) then that’s exactly what your capital is for – buying stock etc I can fully understand people wanting to take advantage of leverage where it exists but the risk should be with their own money and not the banks.
On the web for example there have been times where I’ve had the golden “opportunity” to invest heavily in traffic where I know the major benefits will be time limited (only for 1 day in some circumstances). I could have borrowed to fund that in the hope that it all works out. I haven’t and wouldn’t do it. I’m comfortable with risking $1000 of my own money, I’m not comfortable with risking $10,000 of the banks. Running a business is a gamble and I prefer to gamble only with what I can afford to lose.
When a business moans that they need cash for stock the first thought that always goes through my head is “so what the hell happened to the money you’ve made from selling your old stock?” Maybe they decided to buy a new watch, or a new car?
I know I’m harsh about this, it all comes from my less than well off background. My philisophy is simple, I only spend what I have. I seem to get by OK doing that
|Thai
August 5, 2009
Good counter point. I knew you or someone would ask why he doesn’t use his own capital. Simply not all tires are of the 100 dollar domestic car variety. He sells farm tractor tires and 18 wheeler tires that go from 800 to 2000 A PIECE. Not having it in stock when a customer comes in on an unexpected flat is not good in a tire business. PLUS he’s not penalized for not using his own capital to buy tires, his provider (michalen, cooper, firestone) gives him the inventory at no cost or interest until it is sold. When the tire is sold THEN do they give a bonus if the tire is paid in a certain time frame. A customer does not have 2000 dollars up front, he is forced to pay off the tire in installments which my client becomes a lender. His borrowing from the bank is a way of making his margins larger. No risk to the bank since he’ll eventually pay off the amount via his provider’s check and no risk to him since he has really big and mean people working who’ll rip the tires off the vehicle if the customer does not pay the payments
Here is an example of someone using bank to leverage their earning.
Another example that I’ve observed is in the floor cleaning business. When a worker breaks a buffing machine, business grinds to a halt. Without one, no money is made. Here is where the bank comes in. Or if I had ANOTHER buffer, I can do twice the work in the same amount of time and get paid more. I need to make a nearly 10,000 purchase on a good buffer machine. Having been in business for only a couple of years, that kind of capitol is not readily available. If I don’t use the resources of the bank the business will stop if I only have 1 broken one, or not grow if I want 2.
I see you point about businesses and individuals borrowing money for things that are risky. In good times everyone wins, banks get money from borrowers, investors get money to buy stocks they don’t normally have money for and profit, and businesses use the money to attract more customers who in turn make them more money. But as soon as someone yells out ‘the economy is bad now’ everyone suffers. Banks lend less in fear even though THAT how they MAKE money. Businesses get denied money they need for growth and expansion and lose customer, so in turn the company shed employees who go home and yell out ‘the economy is bad now’. Investors start to lose money in those very businesses so THEY quit buying which makes people who invest in them to grow their saving lose their money and yell out ‘the economy is bad now’.
All it takes is someone to say ‘the economy is healthy now’ and everything will go right back to where it was…wasted spending, sloppy investing, and careless money lending.
|.-= Thai´s last blog ..One of the Smallest and Fastest pdf reader SumatraPDF =-.
Stefan
August 5, 2009
This makes me think about car makers and why they are being given millions of dollar at the moment.
“So, no one have bought our cars for several years.. Which means we are losing money and still having a lot of cars no one wants.. Would you like to lend us some money so we can continue to build more cars no one will buy?”
Why is this accepted in their business?
|.-= Stefan´s last blog ..Monthly Roundup – July 2009 =-.
Paul B
August 5, 2009
@Thai – Awesome comment, and I totally agree about the confidence point. Somebody shouts “the worlds ok now” and it’s spend spend spend (and vice versa).
@Stefan – Your guess is as good as mine. There are car parks jammed with thousands of new cars that nobody wants to buy outside these factories and yet the money keeps flowing into these companies. I guess it’s a sort of state benefit – rather than have them on unemployment benefit give the company the money instead. We are living in crazy times.
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