Crunching on Credit

Tonight's Panorama program entitled 'Credit Where It's Due', which features a documentary by Theo Paphitis of Dragon's Den fame, looks at some of the experiences of Britain's 4.5 million small companies who provide some 13 million jobs in the credit crisis.

It should be interesting viewing and I am sure we all have our stories to tell. On the program will be comments from Lord Mandelson and there will be some shining examples of how banks and large companies take out their woes on small businesses.

Big Company Syndrome

One example was particularly appalling - a small dental supplies company in Herefordshire was unilaterally sent a notice by Boots plc, one of its customers, telling it without notice, reason or discussion that they were moving their maximum payment terms from 30 to 75 days. It means, as we all know, that using end of month 'supplier payment runs' Boots can extend terms to beyond 100 days. In this particular example, Boots not only paid after 75 days but took a 2.5% discount for doing so without negotiation or notice - no doubt assumed to be a 'prompt payment' discount. In any other circumstance such un-agreed terms could be breach of contract at minimum or, in terms of the discount taken, even theft. But as the small business is dependent on Boots for a major line of business, it just has to sit there and take it. The example was not exaggerated as Boots admits on the program that it is 'reviewing its terms' and does not deny doing this.

Morals, Ethics and The Law

I believe what Boots did was immoral, bad ethics and downright illegal and an abuse of its position as a large customer to many small firms dependent on its distribution skills. No one denies them the right to want to change terms, but there should be discussion and agreement involved beforehand at minimum.

We have a local chemist acquired by Boots - it will be the last time I use it.

For many of us in small business this is not at all unusual. While we try and pay our own suppliers as well as we can because failure to do so will effect our credit terms and therefore ability to run our cashflow and expand, our large customers can easily dictate and change terms which are not agreeable to us with impunity from the Law. It is a case of, 'If you don't like it, I will go elsewhere'.

Currently, of my own 5 contracted customers, one of them pays beyond the terms and because it is currently my largest customer, despite discussions and some warnings, they have ignored the contract they have signed and take terms of up to 60 days when my services are given up front. My cashflow is suffering heavily despite buoyant billings and at this stage it means late salary payments at least. In normal circumstances, when contracts are relatively easy to find, I would refuse to do further business with them. However, I do not have that luxury and the people I do the work for remain embarrassed and highly professional - and I enjoy working with them. It is the Finance Department that dictates the rules.

Banks and Their Role

I generally do not have any real issues with my bank. I run my accounts in credit and the only issues I have at times is that I sometimes do not transfer funds into my credit account ahead of big payments from my deposit account and so go into the red momentarily. As I use Internet Banking, this is usually never more than 24 hours and I do get charged but it is rare it happens anyway. However, at one point I had bought one of their high interest bonds with a six month, fixed interest term, which enabled me to park the money I owed in Corporation Tax and make it work for me. For just a week or so only, due to payment timings, I needed cash for salaries at the end of the year which were important to trigger tax refunds.

Would they lend me it? No. Not even the fact that I had held in a Bond in their bank over 5 times the amount of money I required for just a single week, they said they never lent money to fund salaries. In fact, they actually then told me that the terms of my overdraft were more then they should be and reduced it.

As you will see in the Panorama program, the risk of talking to the bank as a prudent measure on funding, can actually work against small businesses, as it can trigger newer, more stringent terms that they are trying to apply. By meeting or talking to you, they can claim to have had the discussion and so implement new terms which, once again, as we are dependent on their good will for our own enterprises means that we have no choice but to comply.

What Were The Bail Outs For?

I come back to the senseless, ill-planned and badly implemented bank bail outs and Government Schemes. Firstly, the bank bail outs have singularly failed in their supposed purpose in helping small businesses and house owners get credit. What has happened is that money has been quickly gobbled up to pay for continued lifestyles for the rich executives, 'wealth creators' and 'rainmakers' who got us into this mess in the first place. Secondly, the banks have used the bail outs to largely save their investment and other banking businesses - their consumer and small business divisions which typically trade profitably have been used as a source of funding to prop up these horribly failed areas. As always, banks look after these stupid executives who run their businesses on 'boom and bust' cycles and know nothing about creating and managing sustainable, steady businesses. That's why they then raid their stable, profitable businesses for cash and fire rafts of the staff in order to cover for their own failure.

In the end, small businesses and consumers pay the price of failure.

So to The Government

Lord Mandelson is a two-time failure in morals so there is no reason to suspect that he or any of the Treasury goons who came up with the bail out and Government Schemes had a shred of compassion for small business. In fact, Lord Mandelson seems only interested in those businesses whose proprietors are fabuslously wealthy which should tell us a thing or two about his morals. The priority was on sustaining the engine of the banking system, those on the edge had to fend for themselves. So there was none of that money that came with the non-negotiable stick that said X% of it goes into INCREASING loans and credit to small businesses. We hear again over the weekend that two banks have defied the Government to pay £2bn in bonuses to staff.

To put that into perspective, those banks will pay in bonus alone nearly double the amount of money allocated under Mandelson's Enterprise Finance Guarantee Scheme. It is abundantly clear where the priority lies.

Further, in some fit of bravado, the Government promised that not only would their departments pay on time, they would pay in 10 days. I can assure you that businesses who depend on Government custom are NOT receiving payments on any invoices in 10 days. It's why most small businesses shy away from doing business with Government as we become small scale banks for them - how fitting then that Mandelson's quote on Panorama tonight will be that 'The Government is not a bank.'

I come back to a central point in my blog of late and don't apologise for it. The Government, in tackling this fiasco, has surrounded itself by advisers from the world of investment banking. This has meant that the very people who failed to spot and gauge the disaster are telling us how to spend vast sums of money in order to get us out of it.

Like the Government, they are proving to know as much about the solution as the cause, and we should not have been surprised.

But what is more shocking and disgusting, is that from the start they have prioritised the saving of their own particular part of the banking industry and system at the cost of the core of banking business and the industries and consumers who depend on them.

And we have paid for it and will continue to do so for years to come.