Banking on a better service

Companies go into receivership or liquidation not because they are sustaining losses, but because they run out of cash. With cash resources they can last a long time in an unprofitable state. It is unfortunate that for most smaller, private companies, the most common, if not the only cash source of cash, is the bank.

Unfortunate as most banks are ill-equipped to make the correct judgements about business. It is not easy to have confidence in a bank which, upon receipt of a hostile take-over approach, announces it will get rid of 8,000 staff. Why hadn’t such savings been made before?

And of course, if you have problems, the bank will suggest, nay insist, that you have a viability report done by an eminent firm of accountants.

Nine times out of ten, that report will say your business is not viable, because, to start with, the accountants are mindful of the consequences to themselves if they say you are viable and you then go under. Also they are likely to be appointed receivers anyway, and will receive a fee.

There are rich pickings in insolvency departments. I recently saw a statement for a tiny business – debtors only raised £95,000. The joint accountants’ fees were £100,000 plus.

I am convinced that in the last recession many companies went under that needn’t have done. Indeed, I believe the recession was worsened by the inexperience of banks – and those who benefited most were the insolvency departments.

Where can the small business go for money if not the bank? Much publicity is given to venture capital groups and company angels. The fact is they usually want a quick exit and a compound return that is unrealistic. Not very helpful if you are struggling and your margins are slim.

Many people now turn to factoring and invoice discounting which has attained some respectability. And the factors themselves continue to improve their scope and terms.

However, what is really needed is a banking system that allows banks to put minority equity into clients, and stay in for the long haul. The backbone of our industry is not made up of high flyers, but of companies that are steady and long established. Some measure of help could be exerted by appointing one or more non-executive directors at modest fees, and by putting limits on the owners’ take out from the company.

Most companies suffer cash problems at times, and if these were eliminated, management could focus on buying, making and selling at a profit, to the great benefit of its employees and its shareholders.

Stuart Mallinson is a consultant to private manufacturing companies.