InCredit

There were 656 construction insolvencies in Q4 2011. When the statistics for Q1 2012 are published, the name S Barratt & Co (Manchester) Limited will feature. For more than 75 years this family-owned business, trading as Barratt, completed projects in the commercial, retail, industrial and large-scale residential sectors. So what went wrong?

Well, of course, the economic downturn played its destructive role. And, in the more recent past, weakening Government support for solar farms doubtless added to their woes. Financial embarrassment was first evident when their 2010 filed accounts turned red - with pre-tax losses of nearly £1.3M most prominent.

Converting the accounts into ratios, their DSO - a measure of the average number of days that a company takes to collect revenue after a sale has been made - increased year-on-year by 42% to 104. Problems were building and, in 2011, serious pressures on cash flow triggered their demise into administration.

Administrators from Duff & Phelps were appointed on 29 November last year with the loss of 43 jobs. Their report tells us that "three large contractors" submitted Withholding Notices amounting to £3M and this, coupled with the (sadly predictable) withdrawal of solar contracts, sealed their fate. Despite redundancies and cost-cutting, no buyer could be found by the administrators, the business could no longer pay its debts as they fell due, and it was declared insolvent.

Now, sub-contractors and suppliers are owed more than £2M and the report tells us there "may be sufficient realisations" for non-preferential creditors. Let's hope it's more than just pence-in-the-pound.

What can you learn from this sad story? There are industry statistics that can provide a generic trend about your buyer's sector - the Office of National Statistics (ONS) is a good source - it tells us that 5,000 construction companies have been lost in the past two years. Most experts agree that cuts to the Government's capital programme and uncertainty around the economy and financing generally means there is little chance that 2012 will see this trend reverse.

Moving from the generic to the specific, a Graydon credit report will reveal your buyer's accounts and ratios which it will interpret into a rating or score. Their historic rating or score is also included and a trend is revealed. Comparisons of your buyer to their industry sector complete the risk profile. But finally, in the words of Aristotle, it's worth remembering that "the whole is greater than the sum of its parts."

SMEs face many challenges and uppermost among them is chasing: chasing orders and chasing payment. According to research by law firm Lovetts, chasing payments in Q4 2011 was a bigger priority for SMEs than it was a year ago. Today, in an attempt to improve their cash flow, firms are using a Letter-Before-Action after 91 days instead of 97 days. Lovetts chairman Charles Wilson says: "There's definitely a feeling of businesses battening down the hatches to ride out the economic storm."

Graydon's own Q4 research found that 51% of businesses experienced an increase in late payments, so it's no wonder that creditors are chasing harder and faster. What is causing the payment delay and what help can SMEs get?

Legislation can help. Indeed, our research also revealed that 76% of respondents thought the government should do more to protect them against late payment. Judging from past legislation, such as the Late Payment of Commercial Debts Act, they have a point. This Act saw suppliers coerced by big business into accepting longer payment terms against their will, and 56% of our respondents fell foul of this deception.

Prevention can help. Regular credit checks can prevent protracted default but all too often they're reserved for checking out new buyers. Monitoring existing buyers is equally vital because their circumstances can change in a heartbeat. SMEs must also understand how important their own credit rating is too. With access to finance so difficult for SMEs, a strong credit rating will provide a valuable source of reference.

Debt collection agencies (DCAs) and solicitors can help. DCAs will typically charge    5%-10% commission to collect a commercial UK debt and they'll do so on a "no collection: no commission" basis and many solicitors offer Letters-Before-Action at a low fixed cost. Both these third-party solutions provide the escalation element of a collection strategy, and they free the SME to chase orders instead of overdue accounts.

All of this help will go a long way to alleviate the negative impact of late payments. And that's great news for the 45% of our respondents who claim late payments will inhibit their ability to invest in people and services. Help is available to SMEs. And with it they could find poetic justice.

On 9th January we touched on the expectancy of yet a further round of Quantitative Easing (QE), however the week ended with the Bank's Monetary Policy Committee (MPC) voting for no change in the fiscal policy, keeping interest rates at their record low of 0.5% and Quantitative Easing (QE) at £275 billion.

The decision of the Bank's MPC last Thursday, to maintain the rates at their current level, follows three closely watched surveys from the Services, Manufacturing and Construction sectors that pointed to genuine growth in December. Economists believe that the results of these surveys suggest that the British economy may be in a state of stagnation rather than contraction, thus decreasing the need for an expansionary fiscal policy.

QE was last increased by £75 billion in October and David Kern, chief economist at the British Chamber of Commerce (BCC) which represents around 100 000 British businesses, calls for banks to be more generous with the available QE allowance in order to boost growth and avoid any further setbacks.

"Since the challenges facing the UK economy will increase in the first quarter of 2012, a further £50bn increase in QE to £325bn would be welcomed by hard-pressed businesses. An immediate increase in QE would strengthen confidence and help to contain sterling rises against the euro, at a time when we must maintain the competitiveness of our exports. Sterling has risen by some six per cent against the euro in the last three months and this puts unwelcome pressure on British exporters," Mr Kern said.

He continues: "QE will only achieve its full potential to support growth if it is supplemented by effective measures aimed at improving the flow of credit to viable businesses. The government must swiftly implement its promised credit easing measures, and the Bank of England should play its full part in supporting such an initiative."

Economists, however, believe that markets will not be able to contend with more QE at this stage, due to the underlying fact that the last round is not due to finish until the end of February and by holding back on more QE, the MPC is allowed more time to assess whether underlying inflationary pressures are easing. This stance seems to have offered the Bank of England a fair degree of solace, as figures released on Tuesday indicate that Britain's high rate of annual inflation slowed in December, for the third month in a row. We have seen the annual rise in the Consumer Price Index (CPI) slow from 5.2% in September to 4.2% in December - reflecting lower fuel prices and widespread discounting on the high street.

Recent research by Graydon UK suggests that in addition to the QE programme, there is still a requirement for an additional link to improving UK SME's access to finance. Our research which looked at the number of successful company financing deals lodged at Companies house over the past decade indicates that the number of UK companies being granted business loans and mortgages has plummeted by almost 50% since 2007. All UK companies are required to inform Companies House after offering collateral security to a financial lender and our figures indicate that there were 100 000 fewer mortgages and loans being registered in 2011, compared to 2007, just before the credit crunch crisis took hold in 2008.

The Government has recently introduced further assistance to SME's in the form of a credit easing programme announced by George Osborne last October, which aims to improve lending and confidence in the economy. Under the scheme, the treasury will buy small firms' corporate bonds providing cash direct to struggling firms unable to gain funds from the banks. The initiative is separate from the quantitative easing by the Bank of England which is, in effect, the printing of money. The proposal - an admission that banks are still not lending adequately - represents a major step by the Treasury and brings it closer to direct involvement in monetary policy, formerly the sole preserve of the Bank.

(JE)

BOEs Q4 2011 credit conditions survey reported banks seeing a sharp fall in loan demand from small businesses. About as surprising as telling us that there is a sale at DFS. Comment from the Federation of Small Businesses hints at why demand for loans is so low; nearly a quarter of its 200,000 members fear their application would be rejected or the loan terms would be too onerous.

Too onerous indeed. The same Bank of England report tells us the cost of lending increased for businesses big and small. Little wonder then that business has lost its appetite for loans. Companies across the spectrum are avoiding debt because of the cost and because lack of confidence makes them risk averse.

The survey provides precious little optimism for SMEs in this new quarter with loan costs rising and credit scoring criteria tightening. To SMEs, bank loan policy must seem akin to providing umbrellas when the sun shines and taking them back when it rains. And right now the economic rain is torrential. The survey was too early to report the impact of the government's autumn credit easing so we'll have to wait to see if this improves things.

This week it's expected that the Bank of England's Monetary Policy Committee will announce yet more quantitative easing (QE) and push it up to around 25% of GDP. With big companies sitting on a mountain of cash it's difficult for me to see why additional QE should alter their strategy and tempt them to invest.

Deloitte's finance director survey confirms this view with 87% of FDs believing this is a bad time to be taking additional risk onto their balance sheet as their major priority for 2012 is to reduce costs and increase cash flow.

According to Barclays Bank nearly half-a-million new businesses were created in the past year, and self-employment is now at its highest for 75 years. "The UK is in the middle of a boom for start-ups. Our best guess is that in England and Wales we are up 4pc to 5pc in the year to November and that's on the back of two strong years," said Richard Roberts, SME analyst at Barclays. This is consistent with the Office for National Statistics latest Labour Force Survey figures for October 2011 showing that a record 4,138,000 people were self-employed, up 4pc year-on-year, and the highest number since records began.

You may find these statistics out-of-sync with the doom-and-gloom headlines that follow every economic forecast. But wait a moment, isn't consumer confidence the springboard for economic recovery? Entrepreneurs are consumer's too; indeed optimistic entrepreneurs to boot. And optimists are stoical members of society who see prosperity where economists see austerity. Where are they finding reason for such optimism?

Interest rates: They're confident we'll see no increase in interest rates in 2012.
Inflation: They're confident inflation will fall in 2012.
Income: They're confident disposable income will increase in 2012.
Growth: They're confident we'll see economic growth in 2012.
Printing money: They're confident the government will print (QE) £100 billion in 2012.

And there's more; £70 billion more to be precise! That's the estimated value of cash corporate Britain has squirreled away to swell its balance sheets - twice its value before the recession. Money the optimist knows will get spent sooner or later.

At this time of resolutions, shouldn't we all take a lesson from the optimistic entrepreneur? SMEs are the key to our economic well-being so this blog resolves to (continue) backing them all the way. On one condition. I urge SMEs to credit vet each-and-every buyer and remember that an order's not an order until the invoice gets paid. And if you won't take my word for it, then listen instead to the words of the Roman senator and historian Tacitus from 2000 years ago: "Reason and judgment are the qualities of a leader."