Smaller businesses are now starting to feel the effects of the financial crisis

David Smith, Andrew Stone and Danny Fortson
October 12, 2008

IN these tough times Philip Fairey is getting used to hearing about his clients “doing a runner”. But a few days ago was the first time he caught one of them in the act.

“We got this message from someone who had been driving down the A6 when he spotted vans outside one of the pubs we supply,” said Fairey. “They had a coffee machine, a glass washer and some other bits and pieces from us, so we went over to see them.”

Finding the landlord loading a van, Fairey, a director of Buxton-based catering-goods business A&M Supplies, asked for payment or return of the goods.

“He told us there was no way he could pay, that there was nothing we could do about it,” he said. “But he said we were free to go in and collect the kit.

“It wasn’t that simple. It was all plumbed in and in any case we would have been breaking the law if we had just taken it. You have to go through the right channels. The next day he had cleared the pub and disappeared.

“Pubs are shutting and people are taking off on overnight flits left right and centre in the area. We’ve written off getting on for £25,000 in bad debt.”

Nonpayment is not the firm’s only problem. Sales have dropped by more than half as the local catering industry starts to shrink. More than half the staff have been laid off.

Now the firm’s bank is refusing to extend its overdraft facility of £250,000 to help the business through its difficulties.

“We are up to our limits with the bank so we’re spending hours juggling finances. Some of the interest rates we’re being offered elsewhere were up to 29%. Thanks but no thanks. We need the support of the bank but we’re not getting it.”

It’s becoming a common story. Tracey Hoather, managing director of parcels-delivery firm Sameday, has seen the downturn coming for a while.

“We battened down the hatches last year. The transport industry sees things earlier than others, because if things are moving slower we see it across our customer base.”

Now she notices businesses she deals with starting to feel the pain.

“We’re seeing small-busi-ness suppliers asking if we can pay them earlier because their overdraft has been reduced or called in, people who were comfortable with 30 or 45-day terms before. One big business asked us for 90-day credit terms.”

Even firms that want to expand are finding it tough to do so. Philip Harney has run a successful tyre-and-exhaust business for 25 years. Turnover was £1.1m this year and the business owns the freeholds of its two depots worth more than £1.5m. Harney has spotted a new site he’d like to buy to expand the business.

The only problem is that the bank he has been with for 25 years wants a high price for the £800,000 he needs. “In 25 years I’ve never been overdrawn in the banking system, yet they wanted astronomical rates and arrangement fees,” he said.

“The banks don’t differentiate between businesses that are struggling and those that are sound.” L A S T w e e k b r o u g h t t h e moment of realisation for many firms and individuals that the financial downturn has become a serious economic crisis. As stock markets tumbled in the worst week since the 1987 crash, gloom deepened.

The beginning of September now seems like an age away, but that was when many business people returned from holiday looking forward to what the autumn and winter would bring. Barely had they got their feet under the desk, however, than the crisis erupted.

Last week’s stock-market dive was the culmination of a series of fast-moving events that began on Wall Street with the rescue of Fannie Mae and Freddie Mac and the bankruptcy of Lehman Brothers.

The British Chambers of Commerce (BCC), in a survey of 5,000 members, said confidence and business activity had slumped.

“The alarming third-quarter results point to worsening dangers of a major economic downturn and rising unemployment,” said David Kern, the BCC’s economic adviser.

“They support the view that a UK recession has started and the downturn is getting worse. The domestic economy is under immense pressure.”

Miles Templeman, director-general of the Institute of Directors, supports last week’s government package to prop up the banking system but is unsure whether it will be enough to help firms strangled by lack of access to credit.

“A lot of companies, especially smaller ones, have been complaining about their inability to get money from the banks to support their activities,” he said. “They are also b e i n g h i t b y a d r a m a t i c increase in interest rates, sometimes 3% or 4% overnight. We don’t know yet if it is enough to unblock the flow of money.”

At the CBI’s Centre Point headquarters in central London, staff are reassessing prospects for next year. “We are reforecasting the economic forecast we published only three weeks ago because it has already been overtaken by events,” said John Cridland, its deputy director-general.

The CBI predicted last month that the UK economy would grow at an anaemic 0.3% next year. “That will certainly now swing into the negative. The real economy is desperately dependent on the rebooting of the banking market,” Cridland said. “It’s still too early to tell whether this recession will be deep and long or sharp and shallow.”

It is not just at the CBI that they are slashing forecasts.

“The economic outlook has taken a sharp turn for the worse,” said Ross Walker of RBS Financial Markets. “This is just as true of the US and the euro area as the UK - recession is staring us all in the face.”

Klaus Baader, an economist at Merrill Lynch, predicted a rise of 350,000 in unemployment as companies shed staff to protect their profitability. “The real recession in the UK hasn’t even begun yet,” he said.

Economists expect unemployment to rise sharply over the next two years, with some forecasters anticipating a rise of 1m in the jobless total. Already, say business groups, the impact of this is being seen.

In the last month the Forum of Private Business (FPB), the industry group for small and medium-sized businesses (SMEs), has seen a 70% jump in calls to its employment line. Most of the calls were inquiries about the redundancy process.

“From our perspective there are very tough times ahead,” said Phil Orford, chief executive of the FPB. “We hope this bailout package will quickly turn into a bit of confidence.

“The SME sector is the engine room of the UK economy and credit is the fuel. We need to make sure banks offer reasonable terms to business and don’t shut off that fuel.”

Russell McIntyre, head of Cornwallis Elt, a London-based recruiter specialising in information technology to the fund-management and investment-banking sectors, said his clients were pushing to cut the rates they paid for workers as part of a wider belt-tightening.

“Contract terms are coming under pressure. They’re getting much more aggressive on trying to push down terms,” he said. For now, however, business has held up well thanks to several large legacy projects that have yet to be completed. Next year, he said, was the worry.

The company’s most rapid growth came in the wake of the bursting of the dotcom bubble in 2001. He is hoping for a similar outcome now.

“We are positioning ourselves now for the upturn in 2010 and 2011, being more flexible with our clients and strengthening those relationships. There is business around, we just have to work harder for it.”

The stock market has already got wind of what will be a string of huge earnings down-grades as businesses suffer from the downturn. Consensus forecasts were for 6.7% profit growth for 2009, but Philip Ish-erwood, equity strategist at Dresdner Kleinwort, said investors were only now coming close to predicting the extent of the damage heading their way.

He predicted a 5% drop in UK corporate profits this year, plus a further 10% fall next year. “And this,” he said, “could be optimistic.”

Philip Shaw, economist at Investec, said: “Companies have been using their existing negotiated facilities, but there comes a point when they will be used up. A lengthy period of higher unemployment and recession is already baked in the cake.” SOME businesses are still keeping their head above water, even though the credit crunch is hitting their customers.

Jason Tavaria, co-founder of Dolphin Music, a musical-instrument retailer, said the approval rate for customers who applied for financing to help pay for expensive kit such as grand pianos and electric guitars had halved in the past month. “Our pass rate before was about 55%, but now it’s at 25%-30%,” he said.

People were still buying cheaper instruments, he added, and for now he was sticking to his expectation that turnover would grow from £10.5m to £15m in 2009. Most of the group’s sales are online.

Corinne Frydman, director of Harpenden Webwide Translations, is struggling to keep up with demand in her business, which translates websites and software into other languages for multinational companies. But even she has taken steps to protect herself by shortening payment requirements to three days or even prepayments.

Frydman, however, believes there is too much gloom around at a time when many companies continue to thrive.

“Business is so good we’re having problems placing translations. I don’t think we’re the only business doing well.”

THE ECONOMISTS’ VIEW

Andrew Smith, chief economist, KPMG If we’re lucky, we could get away with a recession like 1992 but if attempts to stabilise the financial system don’t work, the consequences don’t bear thinking about. If this bailout doesn’t succeed and measures to be announced don’t work, then there won’t be a functioning banking system - and all bets would be off.

Robert Barrie, head of European economics, Credit Suisse Where do we go once we get beyond all this? We’re going to have government intervention in businesses where we didn’t have it before, there is going to be a different regulatory landscape, a bigger budget deficit and more volatile stock markets. We’re not to go back to where we came from and that will be true for individuals, companies, banks and regulators. There is going to be less certainty about the world.

Jim O’Neil, head of global economic research, Goldman Sachs I’m very impressed by the bailout plan. The UK policymakers have done a better job, in detail and speed, than with the whole Northern Rock debacle. The dilemma is that this does nothing for the situation in the US and Europe but, if it were applied globally, the chances of getting money markets back to normality would be very high.

THE SMALL BUSINESS VIEW
Paul Neeson, chairman of JRG Group, a fireplace and furniture company based in Irvine, Ayrshire: We’re working hard to do new products. We’re running just to keep up. We’ve had to be much more flexible and multi-skilled and have our guys working on several things at once. I speak to a lot of businesses and they all say there’s a hell of a lot of unemployment on the way. When you lose people you lose valuable skills and you lose the culture of the business. There’s a lot more stuff the government hasn’t caught on to yet. It’s not just about banks now, it’s about confidence, but I don’t think help will come from government.

Tristram Mayhew, founder and director of high-wire forest adventure company Go Ape: We have reined back plans to expand to seven new sites in the next year and will only open three or four. After meeting a group of partners with one of the big accountancy firms I made my mind up not to pursue growth so aggressively.

They were saying if you’ve got no debt and good cash reserves you should really hunker down. No-one can say where this will end up. It is so unprecedented, so if you don’t need to expand, don’t.

We’re able to survive a 25% drop in sales for at least two years but we are being careful with cash controls and we’re holding nonessential operational spending.

Nick Smailes of Bath-based Power Oasis, which supplies renewable power sources for remote base stations: In this climate, it’s a better idea to raise what you need to get you to the next stage. Money is getting more expensive and everyone is getting more cautious, so we’ve decided to get to the next stage of development so we can prove to our investors that we are still on target.

You also have to be careful who you have as customers. We’re talking to one company with billion-dollar loans on its balance sheet that does not look far from being illiquid. You have to question the credit rating of large companies and if necessary demand payment upfront because a start-up cannot afford to wait six months to get paid.

Tracey Hoather, managing director of parcels delivery business Sameday: We battened down the hatches last year. We got an inkling this was coming.

The transport industry sees things earlier than others, because if things are moving slower we see it across our whole customer base.

We will do everything possible to defend our vehicle-development plan.

We’ve been in business for 25 years and we’ve been through downturns before, but I feel sorry for businesses that have overextended.

We’re seeing people getting into difficulties resecuring loans.

A lot of the smaller ones are using their credit cards to keep the business.

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