05/05/2011

Directors in the ‘Twilight Zone’

By Paul Wood, Associate Director, Restructuring and Recovery at Smith & Williamson

Many entrepreneurs and company directors feel like they’re in a commercial battlefield at present. They’re being battered from all sides and can only see the position generally worsening as austerity measures implemented by the Government start to bite.

Unsure what the next set of challenges will be, or how their companies will survive them, some directors are taking risks that perhaps they should not be taking.

Unusual economic conditions

Official statistics show that up to December last year 395,400 time-to-pay (TTP) arrangements had been granted, involving tax totalling £6.83bn. This exceptional amount of support from the Government over the past two years has helped companies survive.

However, times are changing and we’re seeing evidence of HM Revenue & Customs hardening its stance on companies renegotiating TTP plans and the leniency shown previously is starting to disappear.

Interest rates

Interest rates have been at an all-time low of 0.5% for two years. Losses that some companies would be making had they still been at pre-recession levels are therefore being masked.

The majority of economists believe that interest rates will rise this year and by the middle of next year could be somewhere near 2% in order to curb inflationary pressures. This increase will cause companies that cannot afford the repayments to either look at further cost cutting (where they’ve probably been dramatically slashed already) or face defaulting on their loans.

The banks’ position

Banks have had no option but to be supportive of businesses during the recession because their security, primarily on property, was dramatically affected when the property market collapsed at the beginning of 2008.

Many banks are allowing businesses to pay only the interest they owe and freezing capital repayments to help them survive. As interest rates increase this may become impossible for many companies and it will then be down to the banks to decide whether to change strategy and perhaps consider enforcement.

Challenges for directors

UK business is clearly going through a challenging period. Many companies are just about surviving day-to-day, with their balance sheets exhausted and all means of finance having been utilised.

Many have survived one of the longest and deepest recessions in living memory by implementing stringent controls on costs, making redundancies and holding back on capital investment. These companies cannot reduce their cost base further and are unlikely to be able to deal with the pressures that may be coming, especially if they all come at the same time.

Directors and business owners need to be very careful that, as these pressures start to mount, they avoid trading while insolvent and take advice at an early stage if they become aware that these or other issues will adversely affect their businesses.

Early discussions with banks, the tax authorities and other major stakeholders are vital to the survival of a company that is experiencing financial difficulty.

If you would like to discuss any concerns about current trading conditions and actions you can take, contact Paul Wood on 0117 376 2269 or email paul.wood@smith.williamson.co.uk

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