Astonishingly the list of failed banking establishments gets bigger by day, Robert Peston lists them on his blog (see link to the right). We have not seen the like before, Unfortunately I am old enough to have witnessed 3 previous recessions, but this is a different animal.
John Moulton says watch out SMEs we are IN RECESSION now.
But hey what's Keith's latest (probably wrong) prediction I hear you say?
Well I am not a short seller, don't have the master of the universe credentials for that, but having seen some strikingly bad balance sheets very recently in the retail sector, I think two banks especially stand out for a BIG FALL.
Kaupthing and Landsbanki, heard of them? Well they own a lot of UK businesses and another investment company Baugur in particular is heavy on retail in the UK. Some of their investments have started to smell a bit recently. You know what I say, "if it smells it's usually off"!
Just how a small country a bit bigger the Isle of Wight, in the North Atlantic has banks that own half of the names on your street is beyond me coz I is thick. But these two banks have so many fingers in pies that they must have problems brewing.
Not that we want to see more failures in the banking sector, do we? But interestingly today the Icelandic central bank /Government rescued Glitnir its THIRD largest bank, which has failed today. Who is next?
PS got a LLP CVA approved today. No creditors turned up, 100% of creditors that voted, voted in favour. More of this when I get time.
PPS used to sell Masters of the Universe toys (made by Mattel), guess they were smarter than some of the numpties who came up with 125% mortgages based upon 6-8 times earnings?
"What's your game then Guv"? Said one avuncular cabby this week, "turnaround and insolvency" says I. "Oh you mean like that Harvey-Jones geezer"?
Once we had the usual FAQ, he said he felt that soon real-world companies would start falling over and he was sure retailers were next after banks, builders and estate agents.
"So mate, who do you think will be the next big name failures"?
As per my August post re MFI I said that we felt MFI was close to tipping point. I also stated that we thought Mike Ashley's Sports World was a prime failure target. So he, not unreasonably said "why"?
The stores are full of rubbish stock, poorly designed layout's, untrained staff, lots of sale items, big rents and the whole shebang strikes me as totally unprofessional retailing. Oh and no-one gets to know what's going on coz Mr Ashely doesn't like the city. That was my little rant, every time I have been into one of those stores I have left disgusted and, as a former retailer, wondering how it manages to make money.
Today Deloitte announced that they had qualified the accounts of JJB Sports and it felt the company was in breach of its bank covenants. That looks a similar organisation, indeed a better run company altogether. So will I be right about Sports World and Mr Ashley?
The cabby didn't think so, but he was wearing a cheap Arsenal shirt, need I say more?
Assume bail outs stop, as they should in a capitalist market, Paulson plan will be followed by Brown plan, Sarkozy plan, Eire plan, Spain plan, UBS (Switzerland) plan....etc if they don't
Half the at-risk banks go, so we will end up with even bigger super banks, is that good for the "market"? Probably not.
So opportunity presents itself to any concert party of rich VC's, investors (corporate or private) local high net worth people, respected business people and others to provide sensible products at good margins to desperate business borrowers.
Mark my words you will see small "banks" bursting out in 2009-2012. They will take assignment of debtors (factoring), offer small loans (perhaps SFLGS?) Possibly taking small stakes in their clients as well. And why not.
Good banking and careful lending is hardly rocket science. Current technology will provide scaleable platforms for growth and by-pass big clearing bank legacy platforms; ever tried to use on-line banking with some of the big 4 machines?
I said months ago money is too cheap now, in future there will be no such things as free business banking, personal banking etc.
This observation is the economist in me, somehow I doubt the politicians are brave enough to let the cycle renew.
If we are to avoid "socialist capitalism" i.e little choice for customers, they must.
I have written this guide to give a basic understanding of the types of charges and a worked example of liquidation will hopefully illustrate it for you.
When a company borrows money the lender usually takes some “security” for that debt, this is designed to protect the lender’s position and also to try and get their money back if the borrower fails.
What is a FIXED CHARGE?
The bank or lender may have provided money to acquire an asset like a building, printing press, car, etc. The company cannot sell this without the lender’s permission. The debt must be repaid as per the loan agreement or facility letter.
Think of a mortgage, you borrow money to buy a house, you cannot own the house outright until the debt is repaid, nor can you sell it without the lenders permission. The mortgage is a form of fixed charge.
Another example is an assignment of a company’s debtor book (factoring or invoice discounting). This means the bank buys the outstanding invoices and lends money against them. The debtor book is then subject to a FIXED charge. In effect the book debts belong to the bank or factoring company, NOT the company.
What is FLOATING CHARGE?
Where a lender cannot obtain a FIXED charge it will take a general or floating charge against the company’s remaining assets. These may include
- Stock, finished or raw material
- Work in progress
- Unfactored debtors
- Fixtures and fittings
- Vehicles or assets not subject to fixed charges
If you think about it these are things that the company uses to generate business and trade, it would not be practical to stick a fixed charge over every item of stock or desks and chairs.
What is a Debenture?
This is the document that sets out the FIXED and FLOATING charges and the attached terms and conditions. When signed by the company the lender sends a form to Companies House to register that charge. This prevents other people getting security against the assets in question, unless a Deed of Priority is created (see below).
What happens if a company goes bust?
This is where things get a bit more complex! Instead of theory here is a simple example.
Suppose a software company has a debtor book of £350,000 against which Royal Bank has provided factoring facility of £250,000 and an overdraft of £20,000. It has £50,000 of fixed assets and 15 people.
It owes £100,000 to tax and trade creditors.
It loses a big client and enters liquidation. The debtor book would be collected (usually by lender and directors who have provided personal guarantees). BUT debtors don’t always get recovered in full of course!
After insolvency costs, a total of £200,000 is collected in from debtors. The business is sold to a buyer for £30,000 “goodwill” and £25,000 for the assets like work in progress, PC’s, equipment etc but not debtors.
So a total of £255,000 is available.
The bank as a FIXED and FLOATING charge holder would be paid out as follows; Debtor proceeds of £200,000 go to pay fixed charge. The Goodwill element is also a fixed charge collection and is paid to the bank as well.
So the bank has a shortfall of £20,000 on the fixed charge.
There are arrears of staff salaries and holiday pay of £20,000. That is paid next, to the ex-staff from the £25,000 received for the assets.
That leaves £5,000 available for the bank under the floating charge collection. It is still owed £20,000 under the fixed charge and also the overdraft of £20,000 remains.
In this very simple example the bank would lose £40,000. The preferential (staff) creditors are paid in full and unsecured creditors get nothing.
Insolvency ranking - prefer to see a picture flowchart (click here)?
What is a Deed of Priority?
If there are a number of lenders and a number of loans a pecking (ranking) order is drawn up and the Deed lays out the order of priority if a default occurs.
What is a Deed of Postponement?
Often a director will introduce money to a company and the bank will require his loans to be frozen until their debt is serviced and or paid.
So I hope this little guide helps your understanding, suffice to say in practice is much more difficult.When a bank sees a shortfall looming it will want a practical solution that ensures the best recovery of its debt obviously, but with asset values falling many banks will see losses ahead.
Efficient and correct in times of plenty for a company, this approach can really bite back when losses pile up and that's when the trouble starts.
Usually the company is making some good profits and the external /tax accountants advise directors /shareholders to mitigate tax by paying your directors a small salary and to take dividends from the reserves of profits made in the past and current years.
So off you go taking money out of the business as instructed. At the end of the year a "tallying" takes place. Of course under Self Assessment the individual receiving dividends must account for this income and pay tax the following year.
THEN something goes wrong!
Although the advice is generally sound, from a tax reduction perspective, when a company is performing well; it’s when things go wrong that directors /shareholders can end up with serious personal liability problems.
Having an overdrawn director’s current account is actually a breach of the Companies Act 1985. All accounts filed at Companies House should refer to any Overdrawn Current accounts as loans to the director concerned.
You must try to get these paid back or reversed in subsequent periods as the Revenue will tax you on a fairly penal rate if you do not, (S419 ICTA 1988).
If the company has no distributable reserves, it cannot pay dividends. So if your company’s balance sheet starts a year with nil or negative reserves , then if you make no profit you MUST STOP taking dividends as soon as you are aware of this.
It is much better to pay yourselves through PAYE and pay the tax/NIC. If the company cannot afford to pay you GROSS then it is pretty much insolvent. Questions need to be asked about viability too.
Well options include:
Repay the debt you personally owe to the company.
Offset any loans the directors have made to the company (this is called set off).
Take your full salary but reduce the cash you take out of the business to gradually offset the account. So pay yourself £4,000 per month but take £1,000. Remember to pay tax on the £4,000!
Make a lot of profits in future periods to offset it!
Use a Company Voluntary Arrangement to reverse the account through the PAYE Scheme. (We are experts at this - want to know how to fix the problems your company faces (see CVA - the best rescue mechanism).
What happens in liquidation if we have overdrawn current accounts?
In liquidation the liquidator can demand that directors repay their overdrawn directors current account to the company for the benefit of the creditors. They can take legal action to make directors pay this or even make you bankrupt.
So you could lose your house if your directors’ current account is overdrawn and not recovered.
Take advice from good insolvency practitioners or from KSA.
Lehman Bros, HBOS, Merrill Lynch, AIG, all effectively bust.
When asked if he thought any other big banks would fail/be gobbled up or merge a banking expert said last night "I don't know its only Wednesday"!
The stench of fear is driving things now, I have been predicting crisis for months, but I am frankly stunned at the names that are toppling over. Where will it end?
For SME business people (my client base) I am predicting the following
- Less credit availability
- More expensive credit
- Many will fail because their banks have lost control and pull in lending to SMEs
In the last 12 months we have been warning business people to cut costs, cut costs and cut costs. Manage cashflow daily, make sure your debtors pay on time. Boy at times I thought we were barking up the wrong tree, seems not.
These days manufacturers are lean, mean and careful with costs, there is generally no more fat to trim so what tools are available to survive this downturn? Here are a few ideas.
- Work with the banks early if problems are looming. I think the business banking sector has support teams that are much better structured than even 2004. If covenants could be breached in the next 12 months get talking to your bank now.
- Consider insuring your debtor book. Yes this puts costs up but could save you a big bad debt in the next 12 months and therefore save you from insolvency. If you factor or invoice discount ask your lender about their products.
- Invest in a good credit checking tool. Check out people you are dealing with!
- Consider short time and lay offs. Better to do this than redundancies if possible. If not possible then start consulting about redundancies sooner not later.
- Refinance equipment to generate cash and or seek a capital repayment holiday with current asset based lenders (ABL), no one wants to lose your business and a 6 month holiday now could be the fillip your cashflow needs.
- Get your business plan out, dust it off and compare where you planned to be to today's reality. Set out strategies for sales, costs and marketing.Not got a business plan? Well time now to set one out!
- A oft repeated but good KSA tip, control your cashflow daily!
- Got good financial information? Great your are well set to react to difficult times. Not got a monthly profit and loss, cashflow forecast and meaningful balance sheet at the touch of a mouse? Get proper accounting support FAST. One of the most common things I see is poor accounting data. How can you run a business without it?
- DON'T STOP MARKETING!
- Get advice and or take counsel from mentors, colleagues, friends. "A problem shared"... as they say.
"Customers not paying us, we are chasing them hard."
"Cheque bounced from a customer, we are really struggling for cash".
"Our clients signed the order, have had the invoices, but payments dead slow or stop"
"Our factoring company is disallowing more and more of our debtors for age and concentration"!
So whats going on out there?
If our small firm has 25 people saying broadly the same thing (yes their businesses are all insolvent but all creditors payments have been frozen!) then my belief is across the UK, debtor days are rising.
End in sight to the credit crunch, don't bet on it! SME businesses are reporting cashflow problems to us across the board, Banks are being cautious but not withdrawing facilities, just applying covenants and making sure companies are watched.
We will see more pressure between now and January, in particular, on debtor days.
My advice to people is to use credit checking carefully, know who you are dealing with, use a tool like Risk Disk or Creditsafe UK to assess risk, both are inexpensive. Don't give slow payers more credit!
When a customer does not pay on time, the boss should get on the phone to the customer's boss and chase it hard. Don't let their cashflow bring yours down!
Anyway the decision to kill off the stamp duty speculation with a small sop for first time buyers or people buying houses below £175,000 should be welcomed by my clients and other agencies. However, the press have jumped on this saying it wont make any difference! I think at least it clears the air re will he won't he cut stamp duty. As a buyer you might think that this removes a further element of uncertainty.
Price falls will be the key determining factor though for many buyers - will prices fall or rise? My money is on a 25% fall between now and 2010, that would be bad news if your plan is to sell and downsize, but for many people trading up it actually helps them.
The stamp duty holiday demonstrates that the Brown government has a paucity of tools or money available to fix the market. Looks like the market will have to adopt and adapt and fix itself.
My clients tell me that business was slightly better before this announcement, time will tell whether it makes any real difference.