Financial News |
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| Government Backed Loans For Small Companies |
A new "flaky" scheme to guarantee up to some £20bn of loans to small businesses to help them survive the "credit crunch" has been unveiled by the UK government. In return for a fee of sorts, the government will insure banks against small companies falling into arrears on loan repayments. A large voice from around the country can be heard stating concerns that £20bn will not be a large enough injection to get the banks lending decent sums of money. These small companies need to get access to much needed cash. Without doubt the biggest problem for all firms at the moment is "cash flow". I think it would be safe to assume that plenty of people are lining their pockets with mortgage rates dropping due to the BOE base rate falling. However nobody wants to do any real business with small firms due to the risk that they might fold in the near future.
The other half of the government not in power currently want ministers to go further and insure £50bn of loans. Integral to this scheme is a £10bn Working Capital designed to help banks lend much needed capital to small companies. How do you define "as much as is needed"? Dangerous is one option!! I think that with unsound guidelines on who is lending what is a sign of a badly thought through idea. You and I will be paying the price for many years to come.
OK, so a global credit crisis, jobs being lost, rates falling and lower consumer spending amounts to a pretty big hole wouldn't you say? That hole is now full of water so what do we have? You guessed it.... an Ocean! What are we doing about this? We plan on filling this hole with a sand castle with a nice union jack on top so we can run around and congratulate ourselves on a job well done. All I am saying here is other countries are talking hundreds of billions and some even trillions but us? £20 billion.
It would appear that the government are always coming up with half measures, just like the VAT rate cut of 2.5%. This really is a half baked attempt to get a quick cheap thrill but the repercussions of slow and indecisive plans will hurt us. Would you rather follow someone who is 100% convinced they are right or someone who says "we think this might help".
All of these proposals are coming from a really bad run of statistics and models coming from all corners of the country.
The British Bankers Association, which speaks on behalf of the major banks, said that its latest survey showed in the last few months, growth in lending to small companies has slowed but have no fear it is still above 2007 levels.
Company directors are saying that the lack of available finance and loans played a huge part in the downturn of the UK economy. Other reports around the web are stating that company failure rates are approaching 20%! My concern here is that Marks and Spencer are reducing numbers by a few thousand but 20% of small companies would actually mean 100's of thousands in job losses.
Having said all of this some people do believe we have started down the path to turning the ship. I certainly hope this is the case, but I am not as confident in these efforts as some. It is clear that companies are struggling with cash flow so we are proposing to to give them money in the form of a short term loan and then take the repayments back causing another problem in cash flow?
So what are the resolutions?
I think consumer confidence and spending is key, it is thought that people are literally saving money under their beds. The problem with this is no-one is putting money into banks for savings because of interest rates and fear of banks closing. The stocks and shares market is a joke. So everyone is just sitting tight. The cash flow problem for small companies will resolve it's self if we encourage spending and thus in turn we will be securing our own jobs too.
Never let it be said that getting to the root of the problem and fixing it is just an off the cuff saying. Far from it. What has the world done to fix the sub prime lending crash in the USA? I would argue that the problem has not be resolved more over it has been declared a problem and "we are not doing that again" situation. It is not a resolution to a problem, more running from the issue.
All of this links back to the £20bn the government is going to secure for small businesses. We are fixing the wrong problem with the wrong tools!! However these are just my views on the subject.
Graham J Head
http://www.ghead.co.uk
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