Something strange is happening. Most of the time when I look at the business news these days, it is positive. Most indicators show that the economy appears to have turned the corner and we are likely to be entering a period of sustained growth - not fast growth it must be said but slow, steady growth of between 1% and 2%. Perhaps more importantly than this, many surveys of business leaders are showing a greater amount of optimism and of course, optimism generally means more investment and leads eventually to more growth.
However, it’s too early to get overconfident and the dangers to the economy haven’t gone away.
The world economy is slowing down as a whole and even China is seeing much slower growth as it begins to shift its focus from export to domestic markets. The Eurozone issues have not gone away although the prospect of a break-up appears to have been averted, at least in the immediate future.
The banking sector is still dysfunctional and banks are not lending enough to SMEs. Plans to invest will only materialise if the necessary finance is available. Although larger firms have been hoarding cash, the same cannot be said of many SMEs who are reliant on outside finance for investment. While it’s great to see the growth of alternative investment finance such as crowd funding, this is still in its infancy and cannot fund the growth that is needed in the SME sector on its own. The problem with banks needs to be solved.
One particular problem with growth is that it will lead inevitably to interest rates going up. The questions are simply when will this happen and how quickly they will rise.
This leads to a particular problem for firms who are highly reliant on borrowing to finance cashflow. A lot has been said about ‘zombie companies’ over the last year or so: companies that are just about surviving but not experiencing real profits or growth. Such companies will be the ones hardest hit by an interest rate hike although the growth in the economy overall may see their sales increase.
The most likely scenario is that interest rates will stay low for maybe a year and then start increasing. This is therefore the time for firms to concentrate on reducing their reliance on debt to finance cash flow as opposed to investment.
It’s important to set up good credit control procedures and this starts with setting out your payment terms clearly in your terms of business and enforcing them. It’s therefore a crucial time for firms to review their trading terms and conditions and contracts. Getting these right will prevent a lot of problems in the future and will mean that any payment or quality issues are much more likely to be resolved without the need for lengthy and expensive litigation. But, just as importantly, having good procedures will help you reduce your reliance on debt so you will have more protection against interest rate rises and more funds available for growth.