Grey clouds, silver linings
28/1/2008
While there is much to be said for positive thinking, there are times when "telling it like it is" represents the only sensible option - and the economic outlook for 2008 is no exception.
Experts from a broad spectrum of commercial activity agree that this year is likely to present some tough financial challenges for businesses. Nonetheless, there is room for both optimism and opportunity.
Interest rates are certainly an issue that forward-looking companies will need to factor into their plans. The quarter per cent reductions in December and February, following six rate increases will not in itself make a great deal of difference to the financial climate.
All the same, it does suggest that rates have at least peaked and we may well see further small cuts later this year, with the smart money on two more quarter per cent reductions before the summer.
So what does this mean for businesses on the ground, battling to maintain healthy levels of cash flow?
Despite the quarter per cent reductions, interest rates still make the repayment of business loans and the servicing of debts a challenge because they are charged at a premium over base rates. Typically, this means businesses are paying around eight per cent, and often more, which will inevitably take its toll on financial resources. The small reduction helps, but there is still considerable pressure on balances.
Another area of concern is commercial property, with valuations subject to intense scrutiny. The upshot is likely to be that business directors will find it increasingly difficult to locate funders willing to lend against some types of property.
The much publicised "credit crunch" is also having an impact on commercial finance. Lenders rely on cash and this is becoming increasingly tight as banks become reluctant to lend each other money. The Libor rate is now very high, which does nothing to help matters.
Despite these concerning conditions, cashflow finance is still readily available and service charges are very competitive. Just as encouragingly, there is no sign of this situation altering, and factoring companies continue to report strong growth.
Most asset based lenders (ABLs) buy money off banks and lend it at a margin. The ABL market is expected to remain strong, with the possible exception of transactions in which property has been pledged as supporting collateral.
It is estimated that more than 45,000 companies currently use ABL facilities and recent figures suggest that ABL accounts for some £14bn of UK lending, compared with only £3bn 10 years ago.
The appeal of this type of commercial finance is straightforward: using assets to structure funding means management can hold a high proportion of the equity and keep a tight rein as the company moves forward.
Because a large proportion of an ABL funding package is of a revolving nature, businesses can be geared up safely without burden some debt repayments exerting pressure on cashflow. Transactions can also be completed quickly and cost effectively.
All the same, companies should caution against financing their assets up to the hilt and ABL must be used in a sensible and sustainable manner. For businesses that get into difficulty, there are still plenty of options, even in economically turbulent times.
A range of turnaround options, combined with a more enlightened approach from creditors mean that struggling companies can stay afloat, provided the underlying business fundamentals remain viable.
Measures available from turnaround specialists include business performance enhancement, business reviews, operational adjustments, financial restructuring, rescheduling of tax arrears, and interim management. There are even occasions where a business' difficulties turn out to be the catalyst for change that sets it on the road to previously unimagined success.
It would be foolish to pretend that 2008 will be a breeze for most businesses. Yet, with the correct strategies and sound professional advice, there is every reason to believe that a period of promise and prosperity is on the horizon.
