Could economic upturn pose a risk for SMEs?
The economic recovery is gathering pace but some concerns are being raised that the growth being experienced is not necessarily a good thing.
The British Chambers of Commerce predicted that the UK economy will grow in 2014 and could exceed the 2008 highs recorded before the recession occurred.
However, The Corporate Finance Network and its chairman, Kirsty McGregor, have suggested that 65% of SMEs could have poor credit ratings, ultimately meaning the recovery is not entirely positive news.
Their analysis suggests that higher interest rates and lower tolerance levels of company debts that could result from the upturn will inevitably highlight the risk of insolvency for those businesses.
Ms McGregor said the statistics should act as a warning for Britain’s businesses that have survived the financial downturn but that remain at risk.
Investment is seen as a key factor in growth, whereas companies who continue to go about business in a similar fashion to recent years could struggle as a result.
Following previous recessions, the largest corporate insolvency figures occurred once the economy has returned to growth, highlighting the need to be careful this time around.
Not safe yet
This phenomenon is known as the ‘insolvency lag’ and occurred in both the 1980s and 1990s, following periods of recession.
“If you analyse the credit ratings of the SMEs in this country, a staggering 65% of businesses have Delphi Scores (Experian’s credit rating system) of above average risk, high risk or maximum risk,” according to Ms McGregor.
“These businesses are currently surviving through the support of HMRC, the banks and low interest rates. The time is fast approaching where that artificial economy will come to an end and businesses will either turn the corner, or fold completely.
“Businesses can only truly improve their situation if they truly accept that they aren’t in the best places to grow.”
For many companies, the recovery represents an opportunity to invest and expand, but it would seem a significant number are also still struggling to find their feet again.
As a result, a great deal of careful management will be required in order for those most at risk to continue trading.
By Phil Smith