1939 Banks or 2009 Angels

Whilst there are glimmerings of a recovery the economic environment and financial thinking is much the same as in the Slump of the 1930s.

Finding funding for businesses is becoming a major problem for SMEs. Capital has never been so scarce, with bank lending to businesses remaining extremely difficult or only available to the privileged few but even then only at punitive terms. For sound businesses ready to move into their next stage of growth, or for those applying for increased working capital; survival can be a major issue.

Many firms failed at the end of the 1930s just as the recovery began for this very reason.

Banks will continue to be reluctant to lend into the foreseeable future and because of this businesses will be unable to adapt and exploit new opportunities. It follows that when the recovery occurs and the banks are willing to lend again, many businesses will be in such a run down state that they will not qualify for loans.

Sources that have always been available and are not governed by non-entrepreneurial thinking are business angels who will invest in companies in return for equity. Angels can not only provide much needed funds but also offer invaluable expertise, experience and contacts.

Angels expect to leave their investment with the company for a minimum of three years, after which they usually want to exit and take their profit on the shares they hold. This means that not only will the SME remain in control during that period but he or she will get his or her shares back at the end of the period.

SMEs who have been declined by the clearing banks are now seeing the advantage of finding the right angel investor, whether to finance marketing plans, boost working capital or fund acquisitions.

When the economy recovers it would be a disaster if SMEs fell into the same trap that took so many businesses to the liquidator in 1938. Then the winners and losers were determined not by the quality of their product or service but by whether they had planned funding required to take them to the top of the list.

Capital Brokers advice is to ensure, through the business angel sector, that your business is properly capitalised, rather than going cap in hand to an unwilling bank and finding your business impotent through lack of finance when the good times come back.

 

Recession or Slump?

Business in need of funding

Could we be starting another Great Depression? By any measure, our current economic suffering does not approach what this and other nations endured from 1929 through to1939 and the war.

In the depths of the Depression, 25% of the population was out of work. Stock indexes had fallen 89%. For those who had homes and mortgages foreclosures soared. During the Depression, savers watched their money evaporate in bank failures, because then deposits weren’t insured and governments did not intervene. Things were so bad and bankers so unpopular that bank robbers, such as Bonnie and Clyde, became folk heroes in the States.

Few people would deny, that the current economic climate bears disturbing similarities to the start of the Slump

The banking system was crippled in the slump by bad loans and speculation. In 1929, the bad loans were made to stock-market speculators; most recently, the bad loans were made to homeowners and investors in mortgage-backed securities. In 1929 and 1930, the Fed actually raised interest rates, draining liquidity from the USA system, deciding that that was best way to stamp out speculation. In contrast in this recession the central banks have dropped interest rates to their lowest levels in most histories.

Banks stopped lending in 1929 to prudently (they said) avoid further losses, which slowed the economy even further. By the mid-1930s, more than 5,000 banks, world wide, had collapsed. Today, central governments have pumped money into the banking system under the condition that they carry on lending. However, banks have slowed lending to avoid losses, and because of this the credit markets have nearly ground to a halt.

The $700 billion bailout bill in the USA and the UK Government taking massive holdings in the clearing banks to the rate of £3,000 per household  early this year, show that the First World governments are willing to intervene in the financial system to keep it afloat.

Despite these swift unique steps to correct matters the amounts are small compared with the costs to get the west out of the 1929 -1939 slump and peanuts compared with the expenditure on the war. Perhaps we still have a long way to go. The key lies with the banking system, which perhaps rightly, is not filled with entrepreneurial flair but unless they start to take risks a 1929 repeat is not a possibility but a certainty.

For those that are not confident in writing reports why not look at Raise Business Finance a site offering free guidance?

Can’t raise business finance?

Why is that the best financial projects are turned down by banks and financiers? Have you ever wondered how you can fix this? Basically there are 7 reasons why financial proposals fail.

The team at Capital Brokers have produced a 70 page manual that will help you raise business funding and overcome these 7 hurdles. This manual has all the answers and is absolutely free; no strings, no catches and absolutely no obligation. To get this free manual and build your business even in today’s climate go to www.raise-business-finance.co.uk and become your own success story thanks to Capital Brokers.

Writing a Financial Proposal

Producing a Financial Proposal

To be successful a Financial Proposal to a bank or funder must cater for contingency and the most important event that should be allowed for is a rise in interest rates.

A new buzz phrase in finance is “quantitative easing” and the Bank of England’s application of this new operation is the reduction in interest rates which are now at rock bottom. Simultaneously, the Government has introduced the Enterprise Finance Guarantee Scheme (EGS), which will support up to £1.3bn of new lending by banks to eligible SME’s..

The problem with most plans is they do not allow for rising interest rates.

The UK is running massive public deficits. The OECD estimates that the UK’s government budget deficit will be 9.3% of GDP this year and 10.5% in the subsequent twelve months. This is significantly higher than historic average deficits of ‘only’ 3%. However, “increased taxes will recover the situation” politicians claim.

What is at the heart of the deficits? Dwindling tax revenues.

Income tax and national insurance (which accounts accounting for almost 50% of total tax receipts) will contract due to rapidly rising unemployment and stagnant wages. VAT, is falling (and this is the next largest revenue contributor) driven by lower consumer spending plus the 2.5% cut. The next largest contributor is corporation tax and some 25% of this revenue came from the largely insolvent financial sector.

So what’s left? Interest rates.

As inflation gallops back into the economy and with no other resources available the Government is bound to raise interest rates. We marvel at the current “low” but will we be flabbergasted by the future “highs” – because they will come.

When you write a financial proposition it should contain a SWOT analysis. One of the main Threats of 2010 and 2011 will be the rise in interest rates. All lenders are concerned with affordability – that is will you be able to fund the debt? To be successful the contingency that you should cater for in bold letters is an interest as high as that of the Thatcher years. A company that has thought through this problem will increase its chance of success.

All Capital Brokers’ Financial Proposals now allow for this contingency and the impression of its consultants are that all the banks taking part in the EGS expect provision to be made for this certainty.

Help in writing a financial  proposal is to be found at http://www.raise-business-finance.co.uk or by contacting Capital Brokers direct.

Broker Training

To help businessmen that prefer to do things themselves we have devised two six hour courses, the first on how to get the government backed Enterprise Grant Scheme (EGS) where loans of up to £1m can be available and the second on how to get Business Angel Funding where amounts up to £2m can be available. Why not visit Capital Brokers and book on to the next one day course to get skills and contacts that can alter the course of your life.