NEW CREDIT RATINGS ANALYSIS SHOWS TWO-THIRDS OF UK SMES ARE AT RISK FROM ECONOMIC UPTURN
The British Chambers of Commerce this week has predicted that the UK economy will continue to grow in 2014 and the growth figures will exceed those recorded before the 2008 recession.
“Great news” you think!
Not so, warns Kirsty McGregor, Chairman of The Corporate Finance Network (SME finance specialists), whose analysis indicates that 65% of UK SME’s have poor credit ratings (approximately 1.8m businesses). This indicates that any higher interest rates and lower tolerance of company debt from the upturn will inevitably highlight the risk of insolvency for these businesses.
She says this warning is a wake-up call for the Britain’s numerous walking-wounded businesses that have survived the recession, but are still at risk.
The upturn heralds a new time when there will finally be a shake-up of the business world where those that invest will grow, but those who choose to carry on hunkering down, as they have over the past few years, will suffer an untimely demise.
This is typical of previous recessions, when the largest corporate insolvency figures occurred AFTER the economy has returned to growth – a phenomena known as the “insolvency lag”.
Kirsty McGregor, of The Corporate Finance Network, explains: “If you analyse the credit ratings of the SMEs in this country, a staggering 65% of businesses have Delphi Scores (Experian’s credit rating system) of above average risk, high risk or maximum risk.
“These businesses are currently surviving through the support of HMRC, the banks & low interest rates. The time is fast approaching where that artificial economy will come to an end and businesses will either turn the corner, or fold.
“Businesses can only improve their situation if they truly accept that they aren’t in the best place to grow. Typically warning signs for owners that their business is at risk from the upturn are if they struggling to pay creditors or HMRC within agreed payment dates; unable to get credit for even the simplest of agreements, such as leases on office equipment; and of course, the most obvious sign is reported losses or a reduced gross margin.”
The Corporate Finance Network has a three step process a SME business owner can take to make sure they improve their situation ahead of higher interest rates and less-forbearing lenders:
- Undertake a strict review of the state of the business’s health, its productivity and profitability – be aware of your detailed figures, be willing to lose ‘top line’ sales if they aren’t producing healthy margins, and free up resources to target a better quality of turnover;
- Build a plan for growth – review the business’s current working capital cycle and identify requirements in the coming months and years;
- Be brave and be prepared to take action! Alternative solutions, finance facilities and restructuring plans are all readily available in this market, both for strong businesses and also those in trouble. However, leaving it too late will reduce the options available to you.
The Corporate Finance Network and Duff & Phelps (www.duffandphelps.com), the financial advisory firm, are conducting joint seminars over the coming months to help businesses identify alternative courses of action for their future. To attend one of the roadshow’s seminars, please contact [email protected].