How The Recession Hits The 'Recession Proof'

I had a half an hour telephone conversation this week with a client who regards me as something of a business agony uncle, an arrangement which I like to think gives us both some sort of satisfaction. This client purchased his business from his former employer when the latter decided, three years ago, that he had made enough money and was off to live on the French-Spanish border. It's a profitable business, has a well established market, a very good product and provides five people with their livelihood - now it seems that the impact of the recession is finally catching up but not in a way that could have been foreseen six months ago.

This client's suppliers are being run by insurance companies who have taken over the fixing of credit limits and the implementation of debt insurance. What this is doing is tightening up lines of credit. It struck me during our conversation what a hugely ironic state the British economy has reached as it goes into meltdown. For years smaller businesses have been at the mercy of larger corporations, the larger companies dictated the prices, the discount rates and the business terms - all the while their own finances were built on sand, an infinite line of credit that stretched all the way round the world, an intangible line of string which effectively had nobody holding the other end. As the recession bit and banks called in their lines of credit so the bigger companies began to fold, taking some smaller suppliers with them - every job in retail creates something like seven jobs in manufacturing and the service industry. Now what is happening is that because there has been a collapse in confidence, insurance companies and banks are not taking risks and so because historically the bigger companies couldn't be honest about their liquidity the smaller companies are paying the price.

I was told a couple of weeks ago that banks are not lending money because companies are not asking for it, this is rubbish. The truth has been slowly emerging that banks aren't lending money because the government's much heralded loan guarantee scheme doesn't actually exist - it was all a piece of PR fluff. This comes at the same time as banks are now harassing, and that is not an overstatement, their customers to go down the factoring road. Factoring for the small business and particularly for the less financially astute business, is a disaster and the quickest way to a company collapse and yet the banks are actively pursuing this. It is the equivalent of a loan shark coming to your door and promising you and end to your financial worries and then calling back every Friday to take your house apart brick by brick.

Banks are so afraid of not being able to justify their existence that they are looking for personal guarantees, conversion of overdraft facilities to loans (with personal guarantees) and factoring. With factoring a bank decides to take over your debt collection, but never all your debts, in my experience, it's rarely more than 70% of your debts. They then promise to collect those debts and as you issue you more invoices you send a copy to the factoring company for them to 'chase'. In return for this 70% you get a draw down facility - the bank charges you a fee for this which is usually the base rate plus a percentage, they also charge you an administration fee and a handling fee. Factoring removes your control of your debts, it also means that should you want to end the arrangement you have to pay off all monies advanced to you and not yet collected from your customers, it eliminates the chance you have of securing any further borrowing against your book debts and it reduces the most important aspect of your business - customer contact. Now of course Factoring isn't all bad news it can be good, it cuts down on your administration time because somebody else is doing it, it helps with cashflow and it might help financial planning. The fact that banks are saying customers do not want to borrow money whilst at the same time offering them money via this expensive method is, to my way of thinking, deeply immoral.