Crunch time for small businesses

The Institute of Chartered Accountants in England and Wales (ICAEW) is this week (10th February 2009) presenting a report to senior parliamentarians which looks at the difficulties of securing finance and the potential impact this has on businesses.

With the aim of lobbying the government to do more to support struggling businesses in the current challenging economic climate, the reports looks at the credit environment businesses are facing and which finance facilities they are relying on.

According to research conducted by the ICAEW, overdrafts are the most common form of finance for most businesses at the current time. And with many SMEs facing increasing cash flow difficulties, most SMEs with overdrafts see a continued need for this source of funding for everyday business activity.

However, with most SMEs that have an overdraft facility in place reporting that their largest overdraft will be up for renewal before the end of 2009, there is an undoubtedly a worry amongst these businesses that they could be in a vulnerable position if banks decide to change the terms of their overdraft.

Said Craig Blackmore of leading Welsh accountants and business advisors ktsowensthomas: “It is well reported that SMEs are finding it increasingly harder to secure finance and this new research from the ICAEW shows that 2009 will be crunch time for many of them faced with the prospect of renewing their overdraft facilities.

“As many of them will be in a vulnerable position at the moment anyway, if their banks decide to change the terms of their overdraft, increase interest rates on their overdrafts, or even, in the worst case scenario, withdraw their overdraft facility completely, many of them could find themselves facing the prospect of insolvency or looking at cost cutting exercises such as redundancies.

“We are finding that despite the government’s initiatives, banks and building societies are still tightening their lending criteria. In recent years a common lending bench mark was to take a multiple of profits before interest , tax amortisation and depreciation (also known as EBITDA), that multiple was 3 times EBITDA but the belt tightening is now seeing that multiple being cut to 2 times EBITDA.

“In addition, copies of all bank statements for the last 12 - 18 months are being required pre -credit which has not been seen before.

“Enterprise has also been affected by the tightening of the lending criteria as many entrepreneurs use loans to get new companies off the ground. To meet the bank’s security requirements, some are even putting up their family home, as personal assets are the only things they have available to offer as security.

“There is definitely nervousness in the business community. While we cannot assume the renewal discussion with finance providers will result in changes which might threaten business success, or indeed that the success of these firms is dependent on the availability of their overdraft, it is reasonable to assume that the people running these businesses may draw comfort from any government back- up to their funding position which may be available. It is hoped that the findings of the ICAEW’s work will help advise the UK public policy effort to support businesses facing finance difficulties.”

ktsowensthomas is a firm of three-dimensional accountants and tax advisors. With a head office in Cardiff and a regional office in Aberdare, we are well placed to cover the accountancy needs for business and private clients in south and mid Wales. We provide financial and commercial services to owner managed businesses, small businesses, mid to large corporates, public sector, charity, not-for-profit organisations and private clients across south Wales. Our expert Cardiff accountants or regionally based expert advisors would be pleased to review your audit, tax return, business accounts and annual reporting needs.

If you are a small business in Cardiff, Swansea or Newport looking for advice on audit, business consultancy, corporate finance, tax or wealth planning, please get in touch.

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