Recently in Business News Category

We've written lots on this blog in recent times about the lack of bank finance available to small businesses and it's effects in prolonging the recession.

Despite the government's 'credit easing' efforts of late the volume of new lending continues to fall (see page 4). The banks say that it's lack of demand that's driving this trend but even business owners who've successfully applied for loans are saying the process is difficult.

This difficulty is prompting many business owners to look elsewhere for finance and one of the most popular options is invoice finance. This is where a company borrows from a finance company using its outstanding invoices as collateral. You borrow some of the money you're owed now and get the rest when your customers pay. The invoice finance company takes a fee made up of interest and admin charges.

This is an attractive option for small and start up businesses because it eases cash flow worries that come up when customers are paying on 60 or 90 day terms. These kinds of businesses are usually operating at a loss for the first few years or with very slim margins so protecting cash flow and working capital is of paramount importance.

But how does this form of borrowing stack up against traditional bank lending - both in the form of loans and business overdrafts? Let's find out...

With the Jumpstart Our Business Startups (or JOBS) Act having just passed in Washington, the drumbeat for cutting regulations for SMEs in the UK is reaching a deafening volume.

This recent article in the Birmingham Post has university professor Francis Green opining that "the total burden of business regulations on small business is excessive". He cites the fact that a small business spends, on average, £15,000 on employment tribunals (interestingly there's no time-frame for that average - is it over one year? Ten? Who knows - he doesn't give a source).

Many other proponents of regulatory roll-backs are joining in the chant - not least the UK government themselves who, not content with mere deficit cutting, can't wait to hear your red tape slashing suggestions.

So what's the real story? Are the UK's small businesses really drowning in a sea of red tape? Do they face too many regulations? Are those regulations the cause of stifled growth or is there perhaps another, larger millstone hanging around the neck of the UK economy?

58 Separate Regulations

That's how many rules a company with seventeen workers would have to comply with according to the Better Regulation Executive. I couldn't find the source for that statistic, also cited by Francis Green in the article above so I'can't provide a list, but let's assume that the figure is correct.

I'm sure you'll agree that it's reasonable to say that most of those 58 regulations are concerned with registering your company, conducting health and safety assessments and putting in place any H&S requirements as well as paying corporation tax, payroll tax and national insurance contributions.

No one but the most die-hard libertarian would argue that all these regulations have to be in place - a business has to be registered, has to pay taxes on its earnings and employee wages and has to not endanger the safety of its workers. The last one will invite contention for sure, but even if health and safety regulations were relaxed would you really want to bear the full liability for any accidents or injuries that took place on your premises? The laws aren't just there to protect employees after all.

So what's left? What I would argue are the real targets of the whole red-tape cutting brigade - employment laws. In fact most proponents make no bones about this and indeed increasing the period of time after which an employee can claim unfair dismissal from one to two years ha salready made it into law. It is claimed that such legislation will promote growth by allowing employers longer to decide whether a member of staff is worth keeping on.

But do employers really need that long? Or is this legislation merely aimed at making it easier to sack staff when the economy hits the rocks again? Is the reason that small to medium sized businesses can't achieve growth down to heavy legislation or is there a deeper cause to this problem?

4 Year Credit Crunch

The following chart shows how bank lending to SMEs, and small businesses in particular collapsed after the credit crunch and hasn't recovered since (in fact, for small businesses it continues to decline).

(Credit to Ripped Off Britons for the image)


This is despite project Merlin under which banks were forced to promise to lend £190bn to businesses during 2011 (including £76bn to small firms) - a promise on which they promptly reneged, forcing the government to promptly pretend they'd never made them promise in the first place.

What does this have to do with anything? Well, if you run an SME you'll know that you can make as many expansionary plans as you like, plot as much growth as you fancy and it will all come to nothing without the credit to finance it. Without finance businesses can't invest in new staff, new technologies or greater amounts of raw materials, no matter how many regulations are cut.

The Penny Drops

What the UK government is entering into is a race to the bottom. By refusing to take the banks in hand and instead attacking their own laws for protecting not only employees but their own tax revenues they're setting themselves up in opposition to other sovereign governments also trying to attract regulation (and tax) avoiding larger firms. And who among those larger firms are the ones constantly threatening to up sticks and leave for less regulatory heavy jursidictions? Oh yes, the banks themeselves.

Don't be fooled - red tape isn't being cut to help you grow your business. It's being done to make life easier for multi-national financial corporations. These are the very same businesses who are responsible for the current obstacles to economic growth - through the reckless lending and speculative activity that led to the credit crunch and record levels of private and public debt.

So the next time someone asks you to participate in a Red Tape cutting public consultation ask yourself, in the words of Roman consul and Censor Lucius Cassius Longinus Ravilla "cui bono?"

It's probably not you.

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If you're investigating non-bank forms of funding for your SME then be sure to check out invoice factoring - where you post your unpaid invoices as collateral against credit. It's more expensive than bank loans but can be a quick way to inject vital capital into your business expansion plans.

As you will no doubt already know the Royal Mail last week anounced a big hike in the price of stamps and, therefore, in the cost of sending unfranked mail.

(If you didn't know you can read all about it here.)

On the face of it the increases of 30% and 39% respectively in the cost of 1st and 2nd class stamps would seem like a real boost for franking machine companies. As the cost of franked mail is increasing by only a few pence on single letters, surely SMEs all over the place will be rushing to lock in the savings that franking machines provide?

So far, so obvious - and the sheer volume of franking machine activity on the web over the past few days would seem to bear this hypothesis out. But longer term, what will be the impact on physical mail? Are franking machine suppliers really going to benefit from escalating mail prices or will it sound the death knell of their industry?

Could we in fact see a backlash against the use of post, with many companies who before would never have considered going digital being forced into it by the heavy hand of the Royal Mail and OfCom?

The first clues to such a backlash crop up in articles like this in Post & Parcel:

Dismay at "toothless dog" Ofcom over Royal Mail Price Hike

In which several parties, notably the Direct Marketing Association and the Forum of Private Business criticise the price rises and suggest that they "will drive more and more businesses away from mail to cheaper alternatives, which is concerning as mail volumes are already declining year on year." (DMA)

There are also concerns that users will abandon 1st class mail altogether leading to further hikes in the price of 1st class to keep it profitable:

"The quickest way for the Royal Mail to decline further is by pricing businesses out of their service. The costs of business are already high. There needs to be some respite not further crude hikes." (FPB)

And does this puff-piece in Link2Portal contain a note of despair from Pitney Bowes - old enough and large enough to detect a black eye for their own industry?

Rocketing postal rate will require SME rethink, warns Pitney Bowes

The quote in question: "Although digital communications undoubtedly have their place, traditional print campaigns are still critical for most businesses and are likely to remain so for many years to come."

Only time will tell...

What is the connection between Russell Crowe and the difficulty that small businesses are experiencing getting bank loans? In this blog post I'm going to attempt to find it but before I do we first need to solve the question thrown up by this post's title: are we in fact in recession?

The official answer is, of course, no: so far we've only experienced one quarter of economic contraction (in Q4 2011) when two are required for a recession proper. In addition, news today of accelerating growth in the UK services sector (FT - registration required) is causing many economists to revise their previous forecasts and predict a revival of UK economic growth across the board.

These predictions however are but one voice among many and it seems that the consensus is not as optimistic. Long term, the picture doesn't seem rosy - especially for small businesses. As the double edged sword of inflation causes costs to rise and consumer spending power to diminish, small business confidence is sinking lower and lower.

In such an economic climate the temptation is to batten down the hatches, cut costs and try to ride out the storm. Of course, the effect of many businesses doing this at the same time only leads to worsening economic conditions, higher unemployment, less household spending and increased chances of going out of business. Is there any way for a small firm to break the cycle?

This is where Russell Crowe comes in.



Okay, not really Russell Crowe but one of the characters he's played in the movies: John Forbes Nash Jr - mathematician, troubled genius, subject of the film 'A Beautiful Mind' and potentially the provider of key insights in how to manage a small business during a time of economic contraction.

Nash's principal field of study was game theory a branch of mathematics that studies circumstances, in games or otherwise, where the success of one 'player' depends on the choices made by other 'players'. One of Nash's most famous contributions to this field was the concept of Nash Equilibrium.

In very simplistic terms, a Nash equilibrium is a situation in a game involving two or more players where, for any player, changing one's own strategy without the other players changing their strategies leads to no benefit. In other words, every player is locked into playing the same strategy in order to avoid their opponents gaining an advantage - regardless of whether the combined strategies are beneficial to all the players overall. In some instances of Nash equilibrium, all the players could increase their pay-offs if they could all agree on changing their strategies to some new solution of the game.

(Those who've seen the film 'A Beautiful Mind' should think back to the scene in the bar where Russel Crowe convinces his horny mathematician colleagues to all agree to ignore the unattainable blonde and instead concentrate their attentions on her less physically well endowed friends. This way all of them get a fair crack at going home with a date rather than following their natural proclivity to compete for (and get rebuffed by) the blonde thereby ruining their chances with the other girls ).

The most famous example of a Nash equilibrium is the Prisoners' Dilemma where two prisoners are questioned independently. If both stick to their story then neither can be prosecuted but if one 'defects' and implicates his partner he escapes prosecution while the other goes to jail. The outcome that is best for both players overall is to stick to their stories but the Nash equilibrium has both players defecting - because each serves his own short term interests in doing so - and both players therefore facing prosecution.

So how do Nash equilibriums inform our perception of the current UK business climate?

Applying game theory principles to economics is nothing new - in fact, Nash was awarded a Nobel Memorial Prize in Economic Sciences in 1994 - and I am a strict amateur so what follows should be taken with more than a pinch of salt. Nevertheless, I think there are insights to be gleaned.

Let us remember that the UK is no longer the workshop of the world as it was in the 19th Century. Manufacturing and exporting is no longer our main game. Economic health in this country depends to a large extent on consumer spending power. When that spending power is diminished, as has happened recently, large retailers and service companies take a hit to their revenues and start cutting costs. Which often means layoffs, leading to greater unemployment and further reduced spending on the high street. No individual large company can go against this trend as they can't spend money on growth when there is no market (i.e. employed consumers) to take their product. Large companies answer to their shareholders (read pension funds) who would see such risk taking as reckless and unwarranted. Each large company is locked into a strategy of downsizing and cost cutting until the economic situation somehow improves, even though the most profitable strategy all round would be for them all to spend more, pay more wages, raise consumer spending power and create a larger market for their goods and services.

So when does this cycle end? Inevitably when the reduced spending of large companies allows small businesses to start making inroads into the market space concede by those large firms. Almost always, small businesses lead the charge to recovery (FT).

So what lesson can a small business take from this possibly over-extended metaphor?

At the moment finance which allows small businesses to expand is incredibly hard to come by as the banks are trapped in a Nash equilibrium of their own (making). But there are opportunities out there for the small businesses who are brave enough to seek them out - small firms are not trapped in the same cost-cutting and employment slashing cycle as the publicly traded companies - and growth is possible.

I'm not advocating stupid risk taking or risk taking for its own sake but, if you've got a great idea and confidence in the abilities and resources of your company, now could be the time to attempt to break into the ground being rapidly vacated by the large companies. And alternative funding sources like those mentioned in the last post could provide the capital you need to do so (but be wary of venture capital funds).

Who knows, maybe Russell Crowe can save the economy after all...

The first month of 2012 is almost at an end. The days are getting longer and, while temperatures aren't showing signs of rising just yet, it's getting slightly easier to believe that spring will one day arrive.

But will 2012 be a springtime for British businesses emerging from the long winter of recession, or is the economic climate set to get harsher still?

January's business news provides rather a mixed forecast:

1. HMRC showing welcome readiness to resolve small business tax disputes. (DOF Online)
HM Revenue and Customs has (rightly) come in for a bit of a barracking in recent years. Making secret tax deals with corporations like Vodafone and fouling up PAYE tax codes for 1.4m people in 2010 has significantly undermined confidence in the government department. They've also repeatedly been accused of victimising small businesses in order to increase the tax take and help cut the UK deficit. A move by HMRC to introduce a new Alternative Dispute Resolution service aimed at small to medium sized enterprises is welcome then, as outlined in this article from Director of Finance Online, though time will tell whether the new system makes it out of pilot and how much good it will do.

2. Small businesses are the 'real internet companies' says, er, Google(?!) (Telegraph)
In a rare display of humbleness for the search engine giant, Google exec Matt Brittin said at a conference in Brussels that online behemoths like Skype, eBay and Google istelf are not the 'real internet businesses' but that that title rests with SMEs, the 'unsung heroes of the economy'. It seems that Google doesn't mind a bit of competition after all - presumably as long as that competition isn't offering a product or service that Google itself offers and is too small to pose any kind of threat.

3. Small business lending still weakdespite project Merlin (Telegraph)
Project Merlin, an agreement between the Government and the top four banks (Barclays, Lloyds, RBS and HSBC) was finalised almost a year ago in February 2011. The terms were that those banks would lend a total of £190bn to business in 2011 including £76bn to small businesses. So how did they do? Not very well apparently. The banks not only missed those small business targets but also saw a drop in new business lending of 6.1% year-on-year in the three months to November. What are the prospects for this situation changing? Pretty bleak as even larger businesses are now reporting that bank credit is hard to get. As the banks continue getting their balance sheets in order to better cope with the Eurozone crisis small businesses are urged to try alternative sources of investment capital such as http://www.fundingcircle.com/ - a peer to peer social lending programme or http://www.crowdcube.com/ - a crowdfunding enterprise.

4. Auto enrolment pensions for small businesses delayed until 2017 (Guardian)
Those small business owners still grappling with this year's tax return (we hope you've remembered today's deadline) will be relieved to hear that the introduction of at least one administrative headache has been delayed for another 5 years. The auto enrolment scheme was set to bring up to 10m workers into pension schemes for the first time but the DWP have cited "exceptionally tough economic times" as reason for delaying the introduction of the programme - under which employees are automatically enrolled on their employers' pension schemes - until 1st April 2017 for companies with fewer than 30 staff.

5. Facebook to offer free ads to small businesses (Sky)
A generous month for internet giants indeed, January also saw Facebook announce a £4.2m giveaway of ad credits to businesses in the UK, France, Germany, Spain and Italy. Individual buisnesses can get up to £83.16 each of free credits and there will also be free events run by Facebook and local Chambers of Commerce throughout the country explaining how to set up a business Facebook page and use it to engage customers. More sceptical heads might see this as a response to Google's recent introduction of brand pages on their new social network Google+ which, if used shrewdly by businesses, can have a similar effect to advertising.

Those of a less cynical bent are just happy to get free stuff.