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The Debt Advisor: “Dig deep, the worst may be yet to come”

Thursday, November 4th, 2010

Figures published on Friday by the Insolvency Service are likely to show that, despite a growing economy, rates of personal and corporate insolvencies are on the rise again.

According to Credit Action, total UK personal debt stood at just over £1.45 trillion by the end of September, meaning that individuals still owe more than the whole country produces in a year. Couple this with a record level of peacetime public borrowing, and £43 billion a year in debt interest and it clear that this is a large-scale problem.

Bev Budsworth, managing director of multi award-winning, The Debt Advisor, commented: “Over the last decade, personal debt in the UK has increased by over £800 billion and the level of insolvencies has risen from 30,000 per year to over 133,000 last year. In the first half of this year, the number of people declared insolvent was 70,425 – that’s already far more than the total for 2006.”

Following the emergency Budget and the long-awaited Comprehensive Spending Review (CSR) which aimed to repair the public sector finances and reduce borrowing, the country is now facing the prospect of lost benefits, higher taxes and the threat of job losses.

Bev continued: “I feel that the worst may be yet to come. The effects of the CSR will be a slow burn. The increase in VAT next year will have an immediate impact but the deeper effects are likely to ‘trickle’ down over the next three to six months.

“Insolvency takes months to materialise, due to the inevitable debt and redundancy processes. I fear that levels of insolvency will steadily increase, peaking in the second quarter of 2011.

“Whatever the final impact, it’s clear that help needs to be there for those affected. There has never been a greater need to ensure that individuals and businesses alike can survive through what will be a very difficult time financially.

“In some ways, we need to adopt a post-war mentality and really ‘dig deep’. Employers and employees need to support each other, entrepreneurs need to drive their businesses forward, create jobs and support apprenticeship schemes and banks need to continue supporting troubled businesses and increase lending to robust industries.”

As the levels of insolvencies increase, more and more people are likely to turn to the free sector for advice as well as the multitude of private debt management companies. A minority of these firms have recently been marred by reports of non-compliance and are currently under investigation by the Office of Fair Trading (OFT).

Bev explained: “We have an excellent rescue culture in the UK. While you’ll always get the odd ‘rogue trader’ in any industry, organisations like the Debt Resolution Forum (DRF) and the Debt Management Standards Association (DEMSA) are working tirelessly with the OFT to maintain trust in our industry and root these people out. As a result, non-lending solutions such as Individual Voluntary Arrangements (IVAs) and debt management plans are fit for purpose.

“Severe debt carries a number of serious impacts for households and on the country’s finances as a whole. However, the biggest burden on the public purse is from the actual funding of ‘free’ debt advice. The taxpayer currently foots the bill for a plethora of schemes to help people with serious levels of debt. While some of these have been rationalised under the CSR, the majority are still state-funded and swallowing up between £70 million – £100 million to give face-to-face advice.

“The irony is that while these schemes are set-up to help people out of debt, they are costing the country millions at a time when we can least afford it. Many of these schemes simply don’t have the capacity and already have growing waiting lists – these people need help now!”

Bev concluded: “It’s the private sector that will lead the march in the UK’s growth. By using the properly-accredited private sector, the Government can help reduce the financial burden on the taxpayer and, at the same time, provide much-needed invigoration and support to our fragile economy.”

If you would like discuss how our Debt Recovery/Debt Collection service can assist your business, please visit the ‘Debt Recovery/Debt Collection’ section on our website,  contact us on +44 (0) 151 515 3014 or email us.

Please note: Information in this blog post is content property of Business Credit Management UK (www.creditman.co.uk)  and the full original article can be found by clicking here.

Loss of income is top reason for debt for Britons

Wednesday, November 3rd, 2010

The UK may escape a double-dip recession but Brits are still suffering the consequences of a tough economic environment with salary cuts and job losses hitting particularly hard. New data from leading debt solutions provider, Atlantic Financial Management, reveals that loss of income has been the top reason for Britons seeking help with their debts in the past 7 months. And the company believes this trend could continue as the impact of the Government’s Spending Review is likely to see employers remaining cautious about pay rises or overtime in the months to come.

Results compiled from 4,600 new cases between March and September 2010 showed that 34% of people in need of debt advice cited ‘loss of income’ as the catalyst for their financial problems. Juggling multiple credit cards and a number of different creditors was the next biggest reason for needing debt help with 23% stating this was the main cause of their financial woes. For 12% of respondents poor financial management was responsible.

Further reasons for debt included divorce/separation (9%) mental or physical illness (8%) and unemployment (5%).

Kevin Still, Director of Atlantic Financial Management said: “Debt is not the personal choice some consider it to be, as individuals are often left with few alternatives when attempting to balance finances in a difficult economic landscape. With the prospect of job losses in the public sector coming out of the spending review, these findings are serious cause for concern.

“We know that it isn’t always easier to ‘see the wood for the trees’ when the debts start to pile up. So we have developed a free debt calculator to help families and individuals identify where they might need help. By answering a few questions online the calculator can assess an individual’s financial health and provide actions to help prevent worsening debt problems.”

The free debt calculator report, accessible at www.atlanticfinancialmanagement.co.uk provides advice and guidance on areas that appear problematic. The completely confidential results are displayed in a personal report unique to each user.

“This is the third consecutive time in our analysis that loss of income is the primary reason for clients coming to us – financial stress and concerns over job security aren’t a good mix and this is probably the case for over 10 million people in the UK. Inevitably the temptation is to borrow more to make ends meet, but that is when a debt spiral can arise that will explode if there is a major loss of income.

“It’s therefore vital for those concerned about their finances to take action and our debt calculator will provide some valuable guidance” concluded Kevin Still.

If you would like discuss how our Debt Recovery/Debt Collection service can assist your business, please visit the ‘Debt Recovery/Debt Collection’ section on our website,  contact us on +44 (0) 151 515 3014 or email us.

Please note: Information in this blog post is content property of Business Credit Management UK (www.creditman.co.uk)  and the full original article can be found by clicking here.

HMRC reveals 40% increase in bad debts over past 12 months to £6.4billion

Wednesday, November 3rd, 2010

The amount of money owed to the taxman, that HM Revenue and Customs (HMRC) no longer thinks it will recover, has jumped by 40% in the last 12 months*, from £4,557million to £6,367million.

Roy Maugham tax partner, of UHY Hacker Young London office says: “The Treasury is very hungry for cash at the moment – they have a huge hole in the Government’s finances to fill. Our concern is this is all going to lead to much more aggressive debt collection tactics in the future against both individuals and businesses.”

HMRC recently started engaging private sector bailiffs to pursue debts.

The increase in bad debts has been caused by the recession forcing more businesses to keep hold of money they should pay in taxes in order to pay other bills and keep afloat.

Roy explains: “A lot of businesses will have felt they had no choice but to put off paying HMRC. Unfortunately, many of those businesses will have lost that battle to keep trading, leaving HMRC out of pocket.”

Roy says that one area where HMRC may have built up unnecessary bad debts was in the early days of the “Time to Pay” scheme.

“Time to pay” allows businesses to defer tax payments during the recession.

Explains Roy: “In the panic following the collapse of Lehman Brothers very generous terms were offered under the “time to pay” scheme and that may have led to HMRC extending credit to businesses they should not have.”

“If HMRC has piled up bad debts with its early “time to pay” arrangements then that might explain why they are overcompensating in the other direction by choking off the “time to pay” scheme.”

Roy says that one real area of concern is the huge 78% jump in the amount of National Insurance (NI) payments that HMRC has written off which have risen from £516 million to £920million in the last year.

Roy says that where a business goes bankrupt owing NI payments for employees then the Government tops up their NI credits.

Says Roy: “That is a double whammy for taxpayers – they lose the NI payments coming in and then the Government tops up the NI “fund” on behalf of the employee.”

“HMRC really needs to keep an eye on this area.”

Some of HMRC debts become bad debts as they become too old to pursue.

Roy says: “A lot of HMRC’s bad debts have built up as they have become time-barred. It is thought that when HMRC changed their internal systems they temporarily lost track of payments in the process and then were forced to abandon problematic payments that weren’t picked up in time. You are seeing the results now.”

HMRC claims that £29million of the NI debts can no longer be collected because they are six years or older and have become time barred.

*Year to March 31 2010 – based on HMRC’s accounts

If you would like discuss how our Debt Recovery/Debt Collection service can assist your business, please visit the ‘Debt Recovery/Debt Collection’ section on our website,  contact us on +44 (0) 151 515 3014 or email us.

Please note: Information in this blog post is content property of Business Credit Management UK (www.creditman.co.uk)  and the full original article can be found by clicking here.

Manufacturing business failures fall as confidence returns to the sector

Tuesday, November 2nd, 2010

Total administrations in the UK manufacturing sector continue to slow down with figures for the first nine months of the year falling 43% compared with the same period in 2009, according to business advisory firm Deloitte.

The number of manufacturing business failures for each quarter this year have been significantly lower than the same period in 2009, with just 66 administrations in Q3 2010, almost half the 128 seen in the same period in 2009.

Ross James, manufacturing partner at Deloitte, commented: “Whilst there are still mixed messages around confidence in the manufacturing industry, the rate of business failures in the sector is falling which is a positive sign. The decline in administrations highlights the success of the proactive approach adopted by many manufacturing businesses to manage both their cash flows and stock levels. In addition there is now some more, albeit fragile, confidence in the corporate sector to invest, which is translating into orders for capital goods manufacturers.

“As a further signal of confidence, M&A activity in the manufacturing sector has picked up over the past quarter as companies with strong balance sheets are looking to invest and grow. Deloitte’s recent CFO survey showed that over 80% of CFOs expect M&A activity to increase over the next 12 months, with 18% identifying expansion through acquisition as a priority for the coming year. This is positive news for business more generally and demonstrates that companies now have the confidence to look for growth opportunities.”

Administration data from the first nine months of the year shows that the retail sector enjoyed the highest rate of decline with administrations down 50.2%, followed by financial services (47.1%) and manufacturing (42.6%).

If you would like discuss how our Debt Recovery/Debt Collection service can assist your business, please visit the ‘Debt Recovery/Debt Collection’ section on our website,  contact us on +44 (0) 151 515 3014 or email us.

Please note: Information in this blog post is content property of Business Credit Management UK (www.creditman.co.uk)  and the full original article can be found by clicking here.

Managing risk is more important than growth for nearly half of UK firms

Monday, November 1st, 2010

UK businesses have become markedly more risk averse in the last three years, according to a recent poll of finance professionals.

Forty-five per cent of firms surveyed admitted they will prioritise risk management over growth next year. Just over one-third of companies said this was the case for their businesses three years ago.

The growing sense of corporate caution in recent years was also reflected in the finding that 47 per cent of businesses aim to reduce their debt levels next year, compared to 40 per cent in 2008. More than half the companies surveyed intend to cut costs by more than 10 per cent in 2011, compared with 35 per cent who targeted such cost cutting measures in 2008.

The survey, conducted by Accountancy magazine in conjunction with RBS Corporate & Institutional Banking, asked respondents to compare their business strategies for 2011 with the plans they had implemented in 2008. More than 620 finance directors and accountants working in a range of commercial and not-for-profit organisations were polled.

Ken Barclay, managing director, RBS Corporate Coverage UK, said: “The results of the survey reflect the shifting priorities for businesses over the last couple of years and highlight something of a Catch-22 scenario for the UK economy. The recovery will in part be driven by business confidence and investment, but until the outlook becomes more certain a significant number of firms remain more focused on cash generation than on growth, which makes a swift recovery more difficult to achieve.

“However, most customers I speak to remain cautiously optimistic about the future. That said, where increased volatility exists, it is to be expected that businesses will do everything possible to mitigate risk. For many, in the short-term at least, that will take priority over longer term growth ambitions.”

Sally Percy, editor of Accountancy magazine, said: “This research suggests that managing costs and risk will continue to be key areas of focus for businesses going into next year.

She added: “Businesses are worried about the possible impact of public sector spending cuts on their bottom lines and will be proceeding cautiously as a result of this.”

If you would like discuss how our Debt Recovery/Debt Collection service can assist your business, please visit the ‘Debt Recovery/Debt Collection’ section on our website,  contact us on +44 (0) 151 515 3014 or email us.

Please note: Information in this blog post is content property of Business Credit Management UK (www.creditman.co.uk)  and the full original article can be found by clicking here.

Lending to businesses falls again

Monday, October 25th, 2010

Lending to businesses fell for the fifth successive month in July, according to figures just released by the Bank of England (BoE), with £2.5billion less lent to business compared to the month before.

The BoE said that, while credit conditions were easing for larger firms, they remained tight for smaller companies. However, the bank also conceded that lending remained subdued, as businesses concentrated on paying off existing debts rather than taking on new ones.

The bank did report a fall in the cost of borrowing, with interest rates at their lowest effective levels since August 2007.

Lobby groups including the Forum of Private Business (FPB) have warned that businesses will be unable to create jobs and contribute to the economic recovery if access to finance is not improved.

In some cases, small businesses may be able to increase their chances of approval by supplying more up-to-date accounts, as those currently filed with Companies House will cover the worst of the recession last year, and more recent figures may show an improvement.

It has been suggested that returning greater authority to bank managers may improve the situation but such a change is not likely, with Lloyds Banking Group stating this week that it was poor decision-making by managers in the past that led to them being stripped of this power.

If you would like discuss how our Debt Recovery/Debt Collection service can assist your business, please visit the ‘Debt Recovery/Debt Collection’ section on our website,  contact us on +44 (0) 151 515 3014 or email us.

Please note: Information in this blog post is content property of Business Credit Management UK (www.creditman.co.uk)  and the full original article can be found by clicking here.

Q&A: Government Spending Review 2010

Tuesday, October 19th, 2010

After months of warnings, the UK’s “age of austerity” will begin in earnest on 20 October when the government announces the results of its Spending Review.

It will give us the details of which government departments will need to cut their spending, and by how much.

So why are cuts on the cards, what might the impact of those cuts be, and are there any alternatives to cuts?

Why is the government making cuts?

he public finances are in a poor state.

In the 2009-10 financial year, the budget deficit hit a record £155bn, meaning the government spent significantly more than it earned from taxes.

That meant the government had to borrow money to fill the gap, adding to the UK’s growing debts. Total debt is expected to reach £900bn (70% of GDP) in the next few years.

Big cuts to spending are therefore planned to reduce the budget deficit and allow the government to start paying back its debts.

Are there any alternatives?

In closing the gap between income and expenditure, the obvious alternative to cutting spending is to raise taxes.

Tax increases are being introduced, but they account for less than a quarter of the £86bn target.

The previous Labour government, responsible for many of the tax increases adopted by the coalition, said it would aim for something closer to 67% cuts and 33% tax rises. Labour’s new leader, Ed Miliband, has voiced his support for a 50-50 split.

Labour also favour spreading the cuts over a longer time period in order to reduce the pain.

Some left-leaning think tanks have also proposed alternatives. One – Compass – argues that reforms to the tax system, including introducing a 50% income tax rate at a lower threshold, would reduce the need for cuts.

It adds that the cuts should be selective rather than across the board, with items such as the Trident nuclear submarine programme and Private Finance Initiatives (PFI) in the firing line.

What will the impact of cuts on the economy be?

According to Labour, the economy remains fragile and severe cuts to public spending should wait until the economy is strong enough to withstand them.

They say cuts on the scale being proposed risk propelling the UK back into recession – which would push up unemployment and welfare bills as well as cutting tax receipts, thus hampering efforts to cut the deficit.

Economists, as ever, are divided over the impact cuts could have on the UK’s recovery from recession.

The new Office for Budget Responsibility forecasts the economy will grow by just 1.2% this year, and by 2.3% in 2011.

The coalition government has put deficit reduction at the heart of its economic policy, arguing that the poor state of the UK’s public finances poses a greater threat to economic recovery than cuts in spending.

The chancellor has also pointed to the Greek debt crisis that erupted in Europe earlier this year as a sign that the UK’s debts must be tackled as a matter of urgency. He also says his measures will keep interest rates lower than they would otherwise be, thus helping the economy recover.

How did we get into the current situation?

The UK has been running a budget deficit for many years, financing spending programmes through borrowing.

Budget deficits

This is not uncommon, even among the most developed economies, and economists remain divided over the benefits and drawbacks of running a deficit.

But it pushed total government debt up to about 35% of GDP before the beginning of the financial crisis in 2008.

That crisis, and the recession that followed, then forced a huge increase in government spending, with billions spent on stabilising the banking sector, funding economic stimulus measures and welfare costs for the rising number of unemployed.

At the same time the decline in the economy resulted in a fall in tax income, widening the gap between government earnings and government spending to its current record level.

By how much will spending be cut?

The Chancellor, George Osborne, has set himself a target of eliminating the structural current deficit (covering day-to-day rather than investment spending) by 2015-16.

The structural deficit is the part of the deficit that will still exist even when the economy fully recovers from recession.

The Office for Budget Responsibility said at the time of the Budget that the chancellor was on course to achieve that target a year early in 2014-15 with a little bit to spare.

George Osborne says he is “repairing” the deficit to the tune of £113bn by 2014-15. That breaks down into £83bn of spending cuts and £29bn worth of tax rises that year (it adds up to £113bn after rounding).

It is important to note that £73bn of this tightening was inherited from Labour and Mr Osborne has added £40bn. The breakdown for the whole package is now 74% spending cuts, 26% tax rises.

These Treasury figures are expressed in 2014 money (in other words, inflation-adjusted). The spending cuts calculation is based on how much less public spending will be in 2014-15 than it would have been if it had risen in line with inflation.

The independent Institute for Fiscal Studies (IFS) has adjusted these figures and expressed them in “today’s money”. In other words how would the cuts feel today if a sum equivalent to the same proportion of economic output was removed?

The IFS says on that basis the spending cuts would total £68bn and the tax rises £24bn.

What will be cut?

Although the Spending Review is still under way, the government has already given some clues as to where the axe will fall.

Departments are being asked to demonstrate how they might make savings of between 25% and 40%.

That excludes spending on the National Health Service and on overseas aid, managed by the Department for International Development (DfID), which the government has pledged to protect.

Cuts are likely to be at the lower end of that scale. In his June Budget, Mr Osborne said other departments would face budget cuts averaging 25%.

Defence and education spending will not be exempt, but should see less harsh cuts of 10% to 20%, he said.

According to the IFS, that could see unprotected departments such as the Home Office have their budgets cut by 30%.

The welfare system, which accounts for a large proportion of government spending, could also see bigger cuts, adding to the £11bn of savings announced in the Budget.

Is this Spending Review an emergency measure?

No, it’s not. The Spending Review is part of the government’s normal Budget process, introduced by the then-Chancellor Gordon Brown in 1997.

The review is usually conducted every two years, and allows the government to set the spending limits for every government department for the following three years. Before the reviews were introduced departmental budgets could change every year, making it difficult to plan ahead.

Cuts Watch -  Check here for updates.

If you would like discuss how our Debt Recovery service can assist your business, please visit the Debt Recovery section on our website,  contact us on +44 (0) 151 515 3014 or email us.

Spending Review

Tuesday, October 19th, 2010

The Chancellor, George Osborne, will set out the Government’s four-year public spending plans in the Spending Review at 12:30 on Wednesday 20 October 2010.

An introduction to Spending Review

What is a Spending Review?

The Spending Review is a Treasury-led process to allocate resources across all government departments, according to the Government’s priorities.  Spending Reviews set firm and fixed spending budgets over several years for each department.  It is then up to departments to decide how best to manage and distribute this spending within their areas of responsibility.

In addition to setting departmental budgets, the 2010 Spending Review will also examine non-departmental spending that cannot be firmly fixed over a period of several years, including social security, tax credits, some elements of local authority spending and spending financed from the proceeds of the National Lottery.

Spending Reviews have been an important part of governmental planning since the late 1990s.  Prior to their introduction, departmental budgets were set on a year-by-year basis which made multi-year planning more difficult.

The 2010 Spending Review will cover the four years from 2011/12 to 2014/15.

When will the outcome of the 2010 Spending Review be announced?

The Chancellor will make a speech and present the Spending Review to Parliament on 20 October 2010.

How does the 2010 Spending Review relate to the June Budget?

The June Budget set out the overall level of public spending for the four years from 2011/12 to 2014/15.  This is often referred to as the spending envelope.

The 2010 Spending Review is the process through which this spending is allocated to pay for all areas of Government activity including public services, social security, and administration costs.

How are public spending levels (also known as the spending envelope) set?

Public spending levels were set in the June Budget by looking at how much Government can spend whilst meeting its plan to reduce the deficit, given the level of forecast economic growth and taxation.

The June Budget announced that the spending envelope will increase from £640bn in 2011/12 to £659bn in 2014/15. In the absence of any policies that affect Government spending, it is reasonable to assume that over the next four to five years total Government spending would have grown in line with general inflation in the economy. Compared to that assumption, Government spending will be £83bn lower in four to five years’ time as a result of planned cuts inherited by the Government – and new policies announced in the June Budget.

The June Budget announced some specific cost reduction measures, including £11 billion of welfare reform savings and a two year freeze in public sector pay, except for those earning less than £21,000 a year.

How is this Spending Review different to previous ones?

Due to the scale of Britain’s deficit, the 2010 Spending Review will necessitate some tough choices about how the Government allocates spending.

Successfully reducing the deficit will require a completely different approach. So at the 2010 Spending Review, the Government will:

  • think innovatively about the role of government in society;
  • take decisions collectively as a Government, led by the Public Expenditure Committee of senior Cabinet Ministers appointed by the Prime Minister and chaired by the Chancellor to advise the Cabinet on the high-level decisions that need to be taken; and
  • consult widely with experts and the wider public, to get their ideas

The Government has said that its approach to these tough choices will be guided by the principles of freedom, fairness and responsibility. It has also said that these choices should be supported by new and radical approaches to the provision of public services.

In addition, the Government appointed an Independent Challenge Group (ICG) of Civil Service leaders, complemented external experts, to bring independent challenge to the Spending Review process. The group will have a remit to think innovatively about the options for reducing public expenditure and balancing priorities to minimise the impact on public services.

How have you consulted with the public and what difference can the public make to the Spending Review?

The Government launched the Spending Challenge to give public sector workers and the general public the opportunity to submit their ideas on how government could get more for less and tackle the deficit. Three of the ideas are already being taken forward.

What is the process for determining departmental settlements?

At Spending Review 2010 decisions will be made collectively by the Government.  Leading the collective approach is a Committee of senior Cabinet Ministers, called the Public Expenditure (PEX) Committee.  This is sometimes referred to as the Star Chamber.

The PEX Committee will advise the Cabinet on the high level decisions that will be taken in the Spending Review.

Throughout the process of preparing the Spending Review, PEX Committee meetings will be supplemented by discussions between departments and the Treasury.

A Permanent Secretaries Spending Review Group also meet to build the Government’s understanding of the issues, ensuring support for the overall principles and approach and discussing cross-cutting issues.

What is a Star Chamber?

The Star Chamber takes its name from an English court of law established in the 15th century in the Palace of Westminster.  The court took its name from the room in which the court met.

The court was initially intended to bring prominent and powerful people to justice, where ordinary courts could not.

The term Star Chamber was used again in the 1980s for meetings between senior departmental Ministers and the Treasury to resolve spending issues.

Who are the members of the Public Expenditure (PEX) Committee / Star Chamber?

Where can I find additional information on the Spending Review?

The Chancellor set out the Government’s approach to the Spending Review on 8 June 2010.  The accompanying document, The Spending Review Framework sets out details of the Government’s strategy for delivering the Spending Review.

Download the framework as a PDF

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123,361 UK companies experiencing significant or critical distress

Monday, October 18th, 2010

Over 123,000 UK companies are struggling under the weight of nearly £58 billion worth of liabilities, according to the latest quarterly Red Flag Alert, issued today by Begbies Traynor, the UK’s leading business recovery specialist.

The report, which monitors the early warning signs of company distress, has found that 123,361 companies experienced ‘significant’ or ‘critical’ financial distress in Q3 2010, with those experiencing ‘critical’ financial problems owing over £57.5 billion to creditors, suppliers and service providers.

Public sector already suffering

This news comes against a challenging backdrop. Earlier this month, house prices registered their biggest ever monthly fall, and next week the government is preparing to announce the results of the Comprehensive Spending Review, in which it is expected to reveal a raft of spending cuts which will hit those businesses most dependent on public spending hard.

According to Red Flag Alert, 50,299 companies are already experiencing financial distress in these sectors which cover construction, IT, recruitment, advertising and business services. Whilst this represents a slight improvement on the previous quarter, (down 4% compared to 51,711 in Q2 2010), overall the figures show a marked slowdown in the rate of recovery when compared to the 20% improvement in Q2 2010 from 64,805 in Q1 2010. This sharp reversal of fortunes was particularly pronounced in the advertising sector, down 29% between Q1 and Q2 2010, but now revealing a 27% increase in businesses experiencing financial distress in the sector from 705 in Q2 to 892 in Q3 2010.

Ric Traynor, Executive Chairman of Begbies Traynor Group, said: “It will not be until the Government’s Comprehensive Spending Review in a week’s time that we will know for certain the allocation of all of the anticipated £83 billion of spending cuts. However, our Red Flag Alert statistics show that the sectors most likely to be most impacted are already starting to shows definite signs of financial distress. With confidence in the construction sector falling to an eighteen month low, recruitment activity at its slowest for almost a year and a strong increase in distress in the advertising sector, there is a growing risk that even if the wider UK avoids a double dip recession, public-sector dependent industries face higher levels of financial distress.”

The slowdown in the rate of recovery has been found across the board in the latest Red Flag Alert statistics. Overall, although the number of companies experiencing distress has fallen by 10% compared to 137,268 in Q3 2009, the rate of recovery is the slowest for five quarters and compares to a 31% decline in distress in Q2 2010 versus Q2 2009.

In addition, this latest quarter has also been marked by a significant increase in the number of HMRC wind-up petitions – up 39% between August and September, showing that the government may understandably be getting tougher on chasing taxes to increase revenues from both corporates and individuals.

Traynor added: “The decline in the numbers of businesses in distress reflects a combination of lenient creditor attitudes and the effects of temporary government support initiatives, including quantitative easing, the time to pay scheme and low interest rates.

“However, the marked slowdown in the rate of recovery points to the renewed challenges facing UK corporates, as reflected by a recent significant weakening in corporate confidence1, and there is some early evidence that creditors such as HMRC are adopting a harder line in collecting debts.

“Our Red Flag Alert statistics do not fully account for the substantial number of informal arrangements being made between companies and their creditors behind the scenes. We urge businesses to formalise those arrangements, which are not currently legally binding, while creditors remain more sympathetic or risk harsher terms or adverse actions in the future.”

Further distress expected in the consumer facing industries

The consumer facing sectors of retail, leisure and travel have also seen a slowdown in their rate of recovery. 15,500 companies are experiencing financial distress, representing a 7% improvement from 16,650 in Q2 2010 compared to an 11% improvement in Q2 2010 from 15,436 in Q1 2010.

Traynor added: “Retail, leisure and travel are already seeing a slowing rate of recovery ahead of greater pressure on consumers’ disposable incomes from increased VAT rates and public spending cuts. With recent evidence of house price reductions, falls in consumer credit5 and lower savings ratios6, we expect a combination of deteriorating consumer confidence and financial resources to result in growing numbers of business failures in those sectors most exposed to discretionary spending.

“Whilst the retail sector may benefit from a short term boost as consumers purchase bigger ticket items ahead of the VAT rise in January, we expect to see a significant rise in failures in the sector from the first quarter of 2011.”

Unwinding of government support measures starting to have an impact

In addition, Red Flag Alert also shows that there was an 11% increase in companies experiencing financial problems in the automotive sector from 3,007 in Q2 2010 to 3,352 in Q3 2010.

Traynor added: “The automotive sector represents the first sector to feel the impact of the unwinding of temporary government support measures, as shown in an 11% increase in financial distress during the period following the withdrawal of the UK car scrappage scheme in March this year.”

Summary
“We believe that there will be a prolonged period of growth in business distress, as SMEs feel the full impact of the gradual unwinding of government support measures combined with public sector spending cuts and deteriorating business and consumer confidence.

“The £57.5 billion of liabilities still at risk of default by businesses in distress remains a very real and potentially far-reaching threat to creditors and to a smooth economic recovery.

“As the government has acknowledged, its key challenge is to strike the fine balance between maintaining confidence in its ability to reduce the UK’s deficit, whilst ensuring that cuts to public sector spending and the withdrawal of temporary support measures are sufficiently staggered to maintain the recovery.”

If you would like discuss how our Debt Collection service can assist your business, please visit the Debt Recovery section on our website,  contact us on +44 (0) 151 515 3014 or email us.

Please note: Information in this blog post is content property of Business Credit Management UK (www.creditman.co.uk)  and the full original article can be found by clicking here.

Banks to set up small business fund

Monday, October 18th, 2010

The UK’s six largest banks have put forward their plans for boosting the funding of smaller businesses.

Central to the plans is a £1.5 billion growth fund.

The money, which represents about 0.1 per cent of UK GDP, would be invested in firms over a period of years. The fund would buy up to a 10 per cent equity stake in the shares of companies with an annual turnover of between £10 million and £100 million, and with a capital borrowing requirement of between £2 million and £10 million.

In a paper presented to the Chancellor, George Osborne and Business Secretary, Vince Cable, the banks’ Business Taskforce also proposed a list of initiatives aimed at increasing the flow of credit to SMEs.

The banks involved in the Taskforce are Barclays, Royal Bank of Scotland, Lloyds Banking Group, Standard Chartered, HSBC and Santander.

Initial discussions had seen the banks asking the government for the investment of some public funds in the scheme, but this demand has now been dropped.

Instead the money will come entirely from the banks, although they have said they would welcome additional shareholders to the fund and will offer ministers the chance to nominate a representative to sit on its board.

Some of the main points in list of new initiatives include:

Supporting a network of business mentors for small businesses across the UK;

Improving service levels to micro enterprises by setting out in a new Lending Code the levels of service banks will provide and outlining additional sources of help and advice;

Publishing lending principles which clearly set out the minimum standards medium-sized and larger businesses can expect when asking banks for loans and other services;

Establishing transparent appeals processes when loan applications are declined, to be monitored by a senior independent reviewer;

Starting a pre-refinancing dialogue with firms 12 months ahead of any term loan coming to an end;

Supporting the government’s Enterprise Finance Guarantee Scheme;

Helping mid-sized businesses access syndicated debt markets;

Improving access to trade finance through targeted SME awareness-raising campaigns and exploring possible regulatory adjustments with the FSA;

Signposting alternative sources of finance, offering advice if a loan is declined and raising awareness about the financial solutions the business should consider;

Publishing a regular independent survey, commencing in early 2011, so there is an agreed and authoritative set of data on business finance demand and lending supply;

Holding regional outreach events throughout 2011 with business groups to bring together business owners and key staff from the banks;

Hosting a dedicated website through the British bankers Association (BBA) to draw together and link useful sources of information;

And establishing a Business Finance Round Table where senior representatives from the banks and business groups meet regularly to discuss and review trends, identify emerging areas of concern and ensure problems are addressed.

John Varley, chief executive of Barclays and chairman of the taskforce set up by the banks to review finance to small businesses, said: “As banks we have an obligation to help the UK economy return to growth. The private sector will play a key role in the recovery and it’s our job to help viable firms to be successful.”

A joint statement issued by Mr Osborne and Mr Cable said: “This is an important first step and we welcome it. It is important that the banks now deliver on these plans.”

Business groups, too, offered a generally warm support.

Matthew Fell, the CBI’s director of competitive markets, said: “These proposals will make a positive contribution to the financing of British business, which is essential for economic recovery. The measures represent a welcome step forward from the polarised and unproductive debate about lending to business.

“The establishment of a Business Growth Fund will make a helpful contribution to the financing of small companies. It is the sort of scheme that we have been calling for.

“The independent quarterly survey will not only help to monitor the success of these measures, but also provide policy makers, banks and business with useful intelligence to help inform their decision-making.”

David Frost, director general of the British Chambers of Commerce, said: “We are pleased that the Business Finance Taskforce has recognised that the banks can, and must, do more to help small- and medium-sized businesses. It is absolutely essential that the service provided to business customers is improved, so that they can swiftly secure the financing they need to invest, grow and drive the recovery.

“The proposed Business Growth Fund will be welcomed by the minority of SME businesses seeking equity investment. But we need to remember that many businesses are not seeking equity investment – so the improvement of lending processes and business-bank relationships must be the focus of any reform effort.

“Time is of the essence. The faster these reforms are implemented by the banks, the faster confidence will return to the companies that will drive the UK’s economic recovery.”

John Walker, national chairman of the Federation of Small Businesses, added: “Many of the measures announced will give businesses a better understanding about what they should expect when they approach banks as well as an independent right of appeal if they feel they have been treated unfairly.

“This will help to restore confidence and trust that has been lost for both those who can’t access finance as well as those who are wary of approaching the banks.”

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