Weekly Blog by Philip King, CEO of the ICM - 'Never underestimate the value of good credit management'

The Bank of England published its Credit Conditions Survey for quarter 4 of 2011 last week. In summary, it said that although lenders expected a small increase in overall credit availability in the coming three months, it will be impacted negatively by factors such as the economic outlook and tighter wholesale funding conditions. Furthermore, a key determinant of credit availability will be developments in the euro area and their impact on banks' funding conditions. It noted that demand was down across all areas but most significantly from small businesses where it fell sharply. I guess a succinct way of distilling the 17-page report down to a few words would be: a stagnant economy where lack of confidence is stifling demand to spend or invest, and where external factors could have a major effect!

I'm often reminded by our members - and I in turn remind government in meetings - that trade creditors lend more to businesses than the banks and - just as bank lending decisions impact on the ability of the economy to grow - so do the credit decisions of credit professionals. When they decline or accept an order or contract, they impact on the whole trade cycle for themselves, their customer, their customer's customer and so on either negatively or positively. That in turn impacts on the economy and its capacity to grow. In isolation of course, an individual transaction is probably not material, but cumulatively the impact is immense.

In my blog last week, I talked about showing and being proud of our professionalism - that professionalism is manifested in the decisions we reach throughout all credit management activity. Getting them right, whether we're dealing with multi-national corporations or individual consumers, is vitally important and we shouldn't underestimate the impact we have, not only on our own organisations but on the wider economic well-being.

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Weekly Blog by Philip King, CEO of the ICM - 'A positive route to growth'

So the latest Project Merlin figures have been released and they show that, in the third quarter, new lending to business was £57.4bn, of which £18.8bn was to SME's. Let's remember that the full-year targets are £190bn and £76bn respectively with £157.7bn and £56.1bn being achieved so far. Simple arithmetic tells me, assuming nothing much changes, that the total lending target will be achieved and the SME target will probably fall a trifle short. Not surprisingly, the data has generated the usual and expected clamour for banks to be forced to lend more to small businesses.

Regular readers will not want me to reiterate my view with regards the fallacy of 'forcing' banks to lend, and they will have seen my blog last week talking about some basic errors made by start-up businesses. I believe my observations then support my contention that lending decisions should be based on rational - rather than political or emotional - criteria.

I was privileged to be a contributor to the BIS/UKTI-organised UK Growth and Finance Fitness event in London last Thursday, and the subject of SME growth and finance was a recurring theme in Lord Green and David Cameron's opening speeches. Vince Cable also took up the theme in his address, as did Doug Richard, and early Dragons Den guru and an angel investor, who expressed his views clearly and articulately.

The reality of course is that not all SMEs want or need to borrow; indeed a recent SME Finance Monitor report showed that 47 percent never use external funding ('never' defined as neither now nor in the past five years). What we need, therefore, is an environment in which SMEs want - and feel confident - to grow, and one way to achieve that would be through a growth in exporting.

Two statistics in David Cameron's speech struck me in particular: firstly, only one in five SMEs export but if that figure was increased to one in four, Britain's trade deficit would be wiped out; secondly, Britain exports more to Ireland than to Brazil, Russia, India and China combined; the BRIC countries therefore represent a huge potential market.

So why don't more SMEs export, and, perhaps connected, why don't more SMEs want to obtain external funding? I've said in a number of forums with government and others that the key to SME growth is less about obtaining funding, and more about building confidence. Increased confidence would deliver more willingness to introduce new products and services, more willingness to enter new markets either at home or overseas, and more willingness to take on additional staff.

I've also expressed my view that many SMEs don't consider exporting because they see it as a 'dark art' and are afraid of the unknown. I'm delighted ECGD announced at the event that it is changing its name from 'Export Credits Guarantee Department' to 'UK Export Finance' and is going to work much more closely with UKTI. I believe that even such a cosmetic change will make SME's less apprehensive or uncertain as regards what the former ECGD does - and the help it can provide.

A recurring theme also came from the panel of small businesses who are successfully exporting. They started exporting because they were in a desperate situation and it was their last hope of keeping the business alive...and it worked. What we need is more businesses embracing exporting as a positive route to growth rather than a last resort and act of desperation.

Weekly Blog by Philip King, CEO of the ICM - 'Merlin loses its sparkle'

Vince Cable has apparently, and allegedly, admitted that Project Merlin has failed. The Merlin agreement with the major banks guaranteed that lending to small businesses would increase to £76bn in 2011 but his acknowledgement that 'new mechanisms' would have to be considered is a tacit recognition that Merlin hasn't worked. The Chancellor's announcement last week of his 'credit easing' plan of a new credit line for business is further evidence.

As I said at the time, the idea that commercial banks could be 'forced' (as some commentators described it) to lend seemed farfetched at best. Commercial banks have a responsibility to ensure that their lending risks are justified and their lending policies are sound. We've all seen spectator examples in the press of where they may have got it wrong but receiving much less publicity are the numerous cases where they've declined to lend and have been right to do so.

I won't pretend to fully understand the concept of 'credit easing', the detail of which has yet to be made clear, but Phil Orford, the Chief executive of the Forum of Private Business asked three very sensible questions in a recent blog about a scheme which it would appear would require Treasury officials, or officials of an agency specifically appointed for the task, to have a start making judgments on lending taxpayers' money to private sector firms:

• How will they decide which companies deserve a loan from the taxpayer?


• How will the money be channeled to the businesses that need it?


• If these businesses are safe bets, why aren't private lenders already lending to them?

All will become clear in due course and I'll be fascinated to see exactly how it will work.

The other issue that needs to be addressed is how to encourage those business with outstanding debtors to use best practice in credit management to release that money and therefore reduce their external cash requirements. It might even save them having to look for working capital funding at all, but more of that next week by which time I'll have met with two MPs - one Conservative and one Labour - and discussed such matters.

Weekly Blog by Philip King, CEO of the ICM -'Kill or cure the zombies'

On Monday the Financial Times ran a story with the headline "Institutions urged to kill or cure the zombies" which talked about "zombie" businesses, to describe those that can pay interest on their debts but has no viable means of repaying the principal over the long term. The article highlights the fact that many businesses are passed the point of no return but are staying afloat because of low interest rates, HMRC's discretionary Time to Pay arrangements, and/or banks keeping businesses in "intensive care" rather than allowing them to fail. It is little comfort to see a respected newspaper making the very same arguments that I have been saying for at least the last two years in my public assertions that there is a spike of corporate insolvencies waiting just round the corner. I recognise that it has taken longer to reach the corner than I anticipated but I continue to maintain that we are going to see a substantial increase at some point. Too many businesses are in a state of denial and it is only going to take a change in one factor to push them over the edge, be that the rent quarter day this week, a negative response to a request for an extension to the HMRC Time to Pay arrangement, an increase in interest rates, or another factor such as a large customer failing or failing to pay sufficiently promptly.

If you watched Dragons Den this week you might have seen the director of a twenty year old business seeking £100,000 investment to help his business grow. Upon questioning, it became apparent that the business had been loosing money in three of the last four years, had a very low balance sheet net worth and, if current forecasts were met, would be technically insolvent at the end of the current financial period. The argument that sales next year would be much better and would see a return to profit seemed to have little substance and, not surprisingly, there were no takers among the dragons. It's obviously difficult to see the whole picture from a few edited minutes on TV but the scenario of a business thinking tomorrow will be better without realising the reality of its financial situation today is not uncommon.

In the FT article, Christine Elliott, Chief Executive of the Institute of Turnaround said "she would like to see institutions that have potentially viable businesses under their care change their mindset. They should either recognise non-viable businesses and deal with them through insolvency or put in place a transformation plan to achieve their potential". We credit professionals have a very similar task: to recognise viable businesses and help create profitable sales for our own organisations, and to recognise non-viable businesses and ensure exposure is minimised. Sometimes we to have to decide whether to kill or cure the zombies.

Weekly Blog by Philip King, CEO of the ICM - 'Can we influence?'

Last week I mentioned the petition the ICM has launched urging the government to rethink its plans to exempt micro-businesses from filing accounts. Although broadly welcomed with the number of signatories growing by the day, there have been a few dissenting voices on our LinkedIn discussion group (http://linkd.in/ozIELu). One said that we have no chance of impacting the decision because it is an EU Directive; another that it should be a matter of choice for the micro-business determined by their appetite for credit. If they want credit, then they should file accounts and if they don't there is no need for them to do so.

On the first question, this is only a proposal at present and would require ratification before it could proceed and allow Member States to implement locally. More importantly, from what I hear, several countries are resisting it (notably France, Italy and Belgium) while Germany and the UK seem to be the main champions for change. Influencing the UK's stance is therefore a worthwhile exercise, hence the petition. I believe we can influence the thinking of politicians and therefore the progress of the proposal.

As regards the argument that micro-businesses have a choice, I concede there may be many small businesses that do not seek credit and may well never offer credit either; for them, this might save a bit of hassle. But they still need to produce accounts for tax purposes and if they ever want bank facilities, then accounts will be required. Similarly if they tender for a contract with a public sector body (or a large private sector organisation) financial information on the business will be sought, and they need to know how the business is doing and whether it is solvent and profitable. It is true that you can do all of this without filing accounts at Companies House but making financial information a matter of public record has always been the price of limited liability (limiting your personal liability to your £2 issued capital can be very attractive) and online filing means the filing process is getting easier and easier.

Perhaps just as importantly, the filing of accounts allows credit reference agencies to report on small limited companies and many checks are carried out on potential suppliers, customers, and partners that might lead to a lucrative business relationship of one form or another, sometimes without the subject company even knowing. Credit professionals have bemoaned the absence of information on sole traders and partnerships for all of my 33 years in the industry and we're in danger of putting micro-businesses into the same category. Is this proposal going to drive economic growth or stifle it? I know which camp I'm in and - if you agree - then I urge you to sign the petition here: http://t.co/WEZbqw6

Weekly Blog by Philip King, CEO of the ICM - Merlin hype misses the point

There has been plenty of hype this week with regards the banks seeming to miss their quarterly lending target to small businesses. They agreed to lend £76bn to SMEs this year, equating to £19bn per quarter, and the £16.8bn achieved to date leaves them 12% short http://www.bbc.co.uk/news/business-13489884.

I am conscious of not wanting to repeat earlier rants but there are one or two points worth mentioning. Firstly, you obviously can't assume one quarter is going to be the same as the previous one, so to simply multiply by four is naive. Secondly, the agreement was only announced in February when we were already well into the first quarter. Thirdly, and acknowledging that I am repeating myself, it's nonsensical to 'force' banks to lend.

The granting of credit is based on trust that the supplier will deliver the goods, services, or funds required, and that the customer will pay in accordance with the agreed terms. Banks, just like trade creditors, need to set their lending policy and criteria in order to maximise sales and profit while maintaining risk at an acceptable level. It was lending too much to customers who were insufficiently credit-worthy that contributed to the credit crunch in the first place both at a local and global level.

The 'disconnect' between the views of the banks, government, and business organisations remains, and the media takes the opportunity to exploit the differences at every turn. I for one wish we could see a more cohesive message being delivered to business. They should be more prepared to share information about their business so that lending decisions can be better informed; they should recognise that there is often cash (debtors) sitting in their business that could be released by applying good credit management principles; and they should consider other financing options beyond a loan or an overdraft.

And as for the government - and again as I have said before - they need to stop promoting the reduction of financial reporting under the misnomer of reducing red tape. Numbers still have to be produced so red tape is, at best, a fragile argument. Less information will result in less credit. It is a simple equation.

On that subject, the ICM 30-second survey has just gone live. Please let us have your views here.

Next week will be another guest blog by CreditManagement magazine's Managing Editor, Sean Feast, and I'll be back the week after.

Weekly Blog by Philip King, CEO of the ICM - 'Forced lending - no, no, no!'

So Britain's largest banks have finally signed up to a series of pay and lending reforms http://tiny.cc/sbhgo, and whilst I don't especially want to add to the exhaustive comments made before and since the announcement, I was rather captivated by the interview with Vince Cable on Radio 4's PM.

The interviewer, Eddie Mair, was making the point forcibly that the Government has no real power as a result of the agreement and still won't be able to 'force' the banks to lend to small businesses. We know ourselves that the banks' record at supporting businesses is not as good as it is claimed to be, and getting the top level thinking down to local management is similarly not as effective as it might be. We know also that SMEs are not as good at producing credible business plans to support requests for funding as they should be, nor as good at collecting cash due to their businesses as they need to be.

But more than this: we know that the Government doesn't deliver initiatives in a way that makes them easily understood by business, and its follow-through is usually poor; and there is a disconnect between the views of the small business organisations and the views of the banks about the reasons and causes of the funding availability issues.

And yet despite all this, please don't tell me that the banks should be forced to lend to small businesses.

Yes, encourage them to understand their small business customers better and provide them with best advice. Yes also be supportive and imaginative in the help they can provide. But force them to lend? NO, NO, NO

I have seen several examples where a bank's refusal to lend appears to lack logic, and they have made unreasonable and unacceptable demands of their customers. But I have also seen small businesses that are clearly in terminal decline, blaming the banks for their woes when it's obvious that lending more money would only have delayed the inevitable insolvency.

Please let's make sure we don't forget the basic principles of good credit management - you don't lend more than a customer can afford to repay and you drive profitable sales while protecting your business against unnecessary and avoidable risk.

Weekly Blog by Philip King, CEO of the ICM - 'One economist agrees with me!'

An SME 'Access to Finance Research Report' published recently by the Institute of Chartered Accountants in England & Wales (ICAEW) held little in the way of surprises either in its findings or its recommendations. But it was nonetheless interesting.

One of the recommendations that particularly struck a chord with me, for example, was that 'SMEs need to display good financial management'. This is especially pertinent given the work that the Institute of Credit Management has been doing as part of the Doing Business Together initiative http://www.doingbusinesstogether.org/ and the need for greater transparency and clarity from all sides.

Whilst the report suggested that banks needed to do more to improve their relationship with the SME sector, it also concluded: '...well-managed, viable businesses with good track records have been able to obtain the finance they require........'. Such a statement will come as no surprise to those banks supplying the finance or credit professionals providing the trade credit!

I spent one afternoon this week with Roger Martin-Fagg, an economist, listening to his outlook for 2011 and beyond. Roger talks a great deal of sense and can support his arguments well. I was particularly pleased to find an economist who agrees with me that we're going to see a real surge in corporate insolvencies in the months ahead. I've been starting to feel I'm in a minority of one recently but perhaps not, after all!

His views on the difference between 'demand-pull' and 'cost-push' inflation are interesting too; we've got the latter in the UK and - for that reason - raising interest rates alone will not solve the problem. We watch with interest to see what happens next.

Feedback, positive or negative always welcome - use the response form or e-mail me at ceo@icm.org.uk.

Weekly Blog by Philip King, CEO of the ICM - 'Things to look forward to.....'

It has been quite a bit calmer this week after the frantic round of meetings and conferences since the beginning of December, but then the world of credit management never stands still for long.

I was delighted on Monday to meet with Mark Prisk, the Minister for Business and Enterprise, who is already establishing himself as a champion of the SME cause. It was clear from our discussion that the Minister is keen to continue working with the ICM in promoting the importance of cashflow to a growing business.

There was acknowledgement that even with the good work that has been done before between BIS and the ICM, there is still much to do to change the payment culture in the UK and that the Government had a key role to play in supporting and reinforcing the delivery of specific key messages. It wasn't a case of trying to find new initiatives on which to hang our cashflow 'hat', but rather doing more to promote schemes that already exist such as the Prompt Payment Code. I certainly came away with the impression that Mark Prisk means business, and look forward to working with him and his team closely next year.

Yesterday I spent the morning signing off the final proofs for the next issue of Credit Management magazine, and this is probably one of the best issues yet. We lead with the ongoing bank lending saga and research that contradicts the story from the banking community that they have plenty to lend, but no demand. In terms of consumer credit, the editor also takes a detailed look at what lies ahead for the debt sale and purchase sector in 2011.

So unless anything especially momentous happens next week, this is probably me signing off for 2010. It remains only for us all at the ICM to wish you a Merry Christmas and let us all look forward to a prosperous New Year.

http://www.icm.org.uk/ http://www.icm11.co.uk/

Weekly Blog by Philip King, CEO of the ICM - Spot the stars

It has been a busy week that started with the inaugural meeting of the Small Business Economic Forum formed by the new Small Business Minister Mark Prisk. The forum brought together banks and business representatives, among them the Institute of Credit Management, with a remit to 'share their views with Ministers on enterprise issues, in particular economic issues facing small firms'.

What we learned from the first forum is that there is a continuing divide between banks' and business organisations' perceptions as regards to what extent the banks are lending. That, in itself, was not a surprise, but perhaps more of a surprise was the lack of any sign of a solution. In short, it is an issue that is unlikely to go away.

Whether the forum will be successful or not, I do not know. We can only do our best to ensure that it is. Certainly Mr Prisk is of the view that the forum should produce actions, not just words, and that is encouraging. It was good to be invited and welcomed by the new Coalition, and a good opportunity to share views across a wide spectrum of organisations. It was encouraging too to see the engagement of the Business Secretary Vince Cable who joined the meeting in the latter stages to lend his support. http://bit.ly/c3umbH

As I write, I have just finished listening to the statement by George Osborne regarding the Comprehensive Spending Review (CSR). It was a good, if rare, opportunity to listen to a whole speech. It went on for more than an hour and it was hard to get too much detail and that is a pity, for it is in the detail that the devil will be.

Little he said was totally unexpected: 490,000 predicted public sector job losses were in line with predictions, and the impact of people losing jobs, or jobs left vacant, and people entering the market as self-employed will be huge. My worry - and one that I expressed at the Equifax/RBS Exchange Day in London, is that too many start-ups fail to get the basics right. Too many of them are trying to sell the wrong product, or are in the wrong place, or both, and the cuts will produce a large number of people who think they can use their redundancy cheque as a means to fulfill a long-held dream. Sadly, for many, the dream will turn into a nightmare and credit professionals are going to have the challenge of spotting the stars and avoiding the dangers.

For more information about the Institute of Credit Management visit http://www.icm.org.uk/ or follow ICM on Twitter http://www.twitter.com/icmorg.

3rd Weekly Blog by Philip King, CEO of the ICM - Pointless Bank Activity

In the Daily Telegraph on Tuesday, the Telegraph Business Club Editor James Hurley reported on a move by some of the major banks to have the creditworthiness of their business customers independently profiled in an attempt to defuse the row over small businesses' access to finance.

Now I'm generally supportive of banks. I don't want them to lend money to businesses that aren't creditworthy (that is, after all, how we got into this mess in the first place), and I understand the obvious dilemma of being under pressure to repair balance sheets AND lend to small businesses.

This though is disingenuous. Historically, the ICM has always fought against the raising of thresholds for modified accounts. But we all know that most small businesses file modified, abbreviated, or unaudited accounts as it is. Indeed some of them fail to file any form of accounts at all, so the outcome of this exercise is inevitable. The businesses banks won't lend to have poor credit ratings so their decisions can be easily justified!

What would be far more beneficial is if the banks spent time and energy in helping to educate and encourage small businesses to provide management accounts more readily so that more genuine, better informed decisions can be made. Transparency will, of course, be essential, and honesty on both sides would be welcome.

As I told the Daily Telegraph, I'd rather the banks were campaigning for provision of information rather than embarking on what to me seems a pointless and futile exercise.

If you'd like to read the full article click: http://www.telegraph.co.uk/finance/yourbusiness/8000675/Report-on-bank-small-business-lending-decisions-a-pointless-exercise.html