Is the Credit Crunch Easing For SME’s?

In late 2008, in the midst of the deepest recession in modern times, an Essex based entreprenuer decided to start up his own business in the building supplies trade, one of the sectors hardest hit by the downturn. As a former director of a FTSE listed company, the entrepreneur knew his market well and felt that, despite the obvious timing implications, there was still a good opportunity for an independent, professional business to supply building materials to trade and DIY customers within a local area. And whilst starting up in such difficult times was never going to be easy, the business took some comfort from all the headlines screaming that the Government was going to pump enough liquidity into the banks to enable them to lend to UK small business once more, applying some much needed oil to the wheels of UK industry. The reality, as the business was soon to find out, was very different.

Move forward ten months and the business is thriving. But how much support did the business receive from the banking sector? And would any suppliers agree to supply the business on standard credit terms?

The business owner comments “I approached the bank (one of big four) with a cohesive business plan that included a two year financial forecast. I was investing a six figure sum myself and looking for a small overdraft facility for back up. This would allow me to invest as much of my own money as possible into stock and quality staffing, both of which are crucial to a builders merchant. The bank’s small business manager verbally agreed to my request and we progressed with the business set up. A month later, I still hadn’t received confirmation of the overdraft, so I made some chasing calls. I was shocked to find out that “bank policy had changed” and that the agreed overdraft was no longer available. The best that they could promise was that they would review the situation when and if we went into the red. This sounded ominous, and somewhat akin to reviewing the lifeboat situation after having struck an iceberg, so I protested vigorously. After a month of heated discussion, the bank finally agreed to my initial request, but only for a one year fixed period ( and I probably wouldn’t be needing the facility within the first twelve months!) and only if I paid an inordinately high fee up front. That was the best they could do.

The owner reflects; “I really should have shopped around, but at that time we were headlong into the set up phase and I just couldn’t spare the time.”

Fortunately, the businesses trade suppliers have been supportive, with most offering sensible credit terms. Crucially this has enabled the business to do the same with its own customers, most of whom have helped the business find its feet by paying well on time. Bad debt is a current occupational hazard, and the business has suffered one bad debt to date, ironically from a long established contractor whose overdraft facility was removed without notice from the very same bank!

In conclusion, whilst recovery from the credit crunch in the UK with regard to small businesses does still appear to be being hindered by the banks’ cautious attitude to lending, SME’s are taking a more realistic view about risk and reward, and it is this more positive attitude that is in fact mitigating the effects of the credit crunch and helping smaller businesses to improve their cash flow. This should allow SME’s to invest in their enterprises once more, which will be crucial to maintaining a sustained recovery.

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