Small companies urged to review finances as bank lending tightens

A law firm has urged small companies to review their finances after the Bank of England revealed that cash balances held with banks has dropped for the first time in a decade.

Law firm Mace & Jones said it is concerned that early next year bank support could start drying up leaving cash strapped businesses stranded.

Mace & Jones corporate recovery and insolvency partner Dominic Vincent said businesses could not rely on banks to bail them out and need to start reviewing their finances as a matter of priority.

“As the Bank of England figures show both businesses and banks finances are under pressure,” he said. “This is bad news for small businesses and there is an urgent need for firms to tighten their belts and their credit control systems. The next six to eight months could be a rough ride. The banks are likely to be unhelpful as cash is tight and demand for extra cash from corporate customers is intensifying. Furthermore this is against a backdrop of the Financial Services Authority urging banks to hoard funds while the Treasury wants banks to step up mortgage lending. The bottom line is there is less cash around for SMEs.”

Mr Vincent said it is critical for businesses to communicate with banks now and not to spring problems on them at a late stage.

“Financial planning is vital in the present climate to ensure cash flow is healthy,” he said. “Cash is king. If there are problems or could be problems we would advise talking to your bank and implementing an immediate review of internal costs. What savings can be made? Do staff numbers need to be cut? Moreover run credit checks on customers or clients who are bad creditors and review whether it is worth keeping them. Equally be active in business development to find solid financially reliable new clients. It is further worth offering incentives such as discounts for prompt payment and making customers aware of their obligation to pay with prompt invoices.”

Mr Vincent pointed to research by accountancy firm Deloitte which found that the number of businesses going into administration in the North West has increased dramatically in the first quarter of 2008. According to the Deloitte figures, 147 businesses in the region went into administration in the first quarter of 2008, compared to 102 in the same period of 2007 – a sharp rise of 44.1%. Nationally the Insolvency Service has reported the number of firms going into administration rose to 858 in the first three months of 2008 from 557 in the final quarter of 2007.

"Chasing payment can be enormously frustrating and time consuming," he said. "For these reasons businesses should consider outsourcing collections to a legal firm. The authority of a solicitor's letter can snap bad debtors out of their inertia and make them pay quickly. Moreover using a lawyer saves business owners' time and money and allows them and their staff to get on with the job of managing and growing the business. "

New research commissioned by the Banker’s Automated Clearing Services (Bacs) this year showed a massive £18.6 billion is owed in outstanding payments to Britain’s small-to-medium sized enterprises – a leap of £2.6 billion in the last year.

Bacs’ annual business omnibus found that the average amount owed to an SME at any one time is £30,000 - an alarming figure considering almost a third (29%) of those surveyed claimed they could go bust if faced with overdue invoices of up to just £20,000.

The research also showed that almost a fifth of SMEs (19%) now employ a dedicated person to chase in late payments – losing an average of 17 working days a year to this onerous task.