Credit Crunch

Unfortunately this ancient curse seems all too relevant to the economic conditions we live in today. The news is awash with tales of woe and for those in the business community that operate in the construction or related sectors things are certainly far from positive.

The rise in ‘Libor’ (the interest rate banks charge each other for loans to secure their own liquidity), seen earlier this year meant UK banks were in effect paying more for their money. This had the knock on effect of banks requiring higher returns from borrowers to protect margins in order to cover themselves, therefore making borrowing less attractive and lending requirements tighter.

With fewer deals being completed and property prices in many areas reducing the first casualties of the slow down of available credit were always going to be house builders and property developers.

The Managing Director of a local building related business in Doncaster recently commented “We geared ourselves up over recent years to meet increased demand from both private and commercial property buyers, fuelled by relatively low interest and borrowing rates and the availability of credit lines. So with a collapse in the market as severe as we have seen in the last few months it is inevitable that there would be some major cut backs and redundancies and in several cases business failure”.

Unfortunately, as always, there will be a number of businesses in our local economy that although not directly involved in the construction sector rely on building related clients and it is those that are the next most at risk in the coming months. Other sectors that are included in the ‘next most at risk’ list as well as those dependant on construction clients include logistics, retail and those businesses that rely on the discretionary spend of consumers – especially the so called ‘Big Ticket’ items such as cars and kitchens etc.

Having said this we must recognise that for every struggling local business you can find a thriving business. A director of a major retailer told us recently that despite recent economic events “We are currently performing above budget and this year have given all staff pay rises above inflation”.

Indeed, many engineering and manufacturing businesses are in rude health and instead of fulfilling their reputation as a sector in decline now are held as the vanguard of business success through lean, efficient operations.

The business news headlines last week announced that there have been more job losses in the last quarter than anytime since the last recession in the 90’s. Many of our clients are indeed tightening there belts which in some instances does mean job losses but this is more to do with last minute ‘operational spring cleaning’ ready for a tough six months ahead rather than full scale local economic meltdown.

A leading local finance director told us “In testing times we have to look at all of our investments and when one of those is staff, we will make sure we spend more money on training and staff costs to get the best return”. Many of the local employers I speak to see the current economic climate as a reason to invest in training and development of staff rather than it as a time to cut back.

Whether we like it or not businesses increasingly face a new and interesting range of challenges. I was recently told of a client who found themselves in the unusual situation of recently sitting in a trustee meeting where instead of celebrating a healthy credit balance in the accounting information they entered a discussion as to whether it was prudent to keep so much money in one bank account. She commented “It is these sorts of challenges that will never go away and will always be present in one for or another”.

For further information on the services of Sewell Moorhouse contact: nigel.brewster@sewellm.co.uk or call 01302 367444.