Small firms at risk of high indebtedness – business news 11 October 2021
James Salmon, Operations Director.
Small firms at risk of high indebtedness. End of Covid support ‘will fuel insolvencies’. Business output falls to lowest level since lockdown.SMEs should have energy price cap as government offers no solutions. International corporation tax deal. BoE warns of stock market correction as member warns of rise in interest rates Consumer confidence falls. And more business news.
Small firms at risk of high indebtedness
The number of heavily indebted small businesses rose considerably over the course of the pandemic, the Bank of England has warned.
Debt taken on by SMEs rose by a quarter, with many companies which had not previously borrowed going into the red for the first time. This compares to a 2% rise in debt for larger companies.
A third of small businesses now have a high level of debt compared with 14% before COVID-19, according to a special report from the Bank’s Financial Policy Committee.
High debt firms are defined as businesses whose debts are ten times greater than their cash balances. Although the borrowing has been cheap, there could be pockets of difficulty in sectors hit hardest by the pandemic, such as leisure and hospitality.
If your B2B business is suffering under a mountain of debt, did you know you could be owed thousands in late payment compensation? CPA has been helping SMEs discover AND recover the late payment compensation they are due from former business customers who paid them late in the past.
Call CPA on 020 8846 0000 and ask for Peter Uwins to find out how we could help you get your compensation.
End of Covid support ‘will fuel insolvencies’
Insolvencies are predicted to rise by a fifth as pandemic support measure are withdrawn, according to Euler Hermes.
The company calculated that around 18,900 insolvencies were prevented by the Government’s interventions. Across the world, support meant that a possible 40% global surge in company collapses became a 12% overall decline.
Across Europe, insolvencies in Italy are expected to surge by 68% compared with pre-pandemic levels across 2021 and 2022, in contrast to a 4% increase in Germany. French insolvencies will rise 23% by the end of next year.
UK insolvencies will be 32% higher. Separately, experts at RSM are braced for a 60% rise in insolvencies at best, and by as much as 135% under a worst case scenario – which could push bankruptcies above the 30,000 mark.
Business output falls to lowest level since lockdown
The latest BDO Output Index shows both manufacturing and services are experiencing a slowdown with output shrinking to its lowest level of growth since the reopening of the economy. The firm’s inflation index meanwhile jumped to a near ten-year high in the same month, as average prices continued to increase.
“While a gradual deceleration in the pace of growth is to be expected as economies normalise after the pandemic, it is clear that acute labour shortages and supply chain disruption are weighing heavily on productivity,” said Kaley Crossthwaite, a partner at BDO. “Many businesses are caught between a rock and a hard place. Long-term planning for a post-pandemic and post-Brexit economy is crucial, but the significant challenges at their door make it increasingly difficult to focus beyond these short-term issues,” she added.
SMEs should have energy price cap
Business groups are calling for an energy price cap for small businesses which are now facing “dire” levels of pressure from increased costs.
The British Chambers of Commerce has said SMEs with 250 employers or fewer should have their bills capped with the group’s co-executive director Claire Walker arguing that this would give them the confidence to maintain normal business activities.
The comments come as industry leaders warn of serious knock-on effects if energy intensive companies start to fail and call for immediate government intervention.
Government offers no solutions to soaring energy prices
Industry leaders are warning that rising energy costs could bring Britain’s factories to a standstill.
The boss of UK Steel, Gareth Stace, said on Friday that if Boris Johnson and the Government did nothing to help firms, rising prices could start to strangle production. He was speaking after leaders of energy-intensive industries met with Business Secretary Kwasi Kwarteng. “We can’t wait until Christmas and beyond. Or even a few weeks. We need action now, it needs to be swift, decisive action,” Mr Stace said.
His concerns were echoed by Andrew Large, director-general at the Confederation of Paper Industries, who claimed it was clear that across all sectors there were serious risks factories could stop all activities as a result of sky high gas prices.
However, the only offering from Kwarteng so far is a claim that the Government’s strategy to shift to “clean” power sources by 2035 would reduce reliance on fossil fuels. Meanwhile, Ofgem also warned there will also be a significant rise to the cap on energy bills with chief executive Jonathan Brearley declining to deny bills could hit £2,000 next year.
Govt departments argue while energy crisis deepens
Kwasi Kwarteng has been accused by the Treasury of making misleading claims about government plans to offer an energy bailout to struggling factories. The Business Secretary claimed in a series of interviews on Sunday that he was working very closely with Rishi Sunak, the Chancellor, to find a solution for energy-intensive businesses.
But Treasury sources insisted there had been no talks. Mr Kwarteng also said he was certain the UK would have uninterrupted gas supplies this winter and insisted that a price cap on consumers’ energy bills “will not be moved” this winter. Meanwhile, Tory MPs in the north, where there are several steel and chemical plants, have said the question of whether industrial firms would be allowed to fail because of soaring energy costs was a test of the Government’s commitment to levelling up.
Rising gas costs highlight need for sustainable solutions
The Times reports on the small businesses that have sought out sustainable energy solutions and have, as a result, been insulated from the massive spike in gas prices which threaten to derail so many firms.
For example, the founder of Kent-based Juice Executive, Alexandra Auger, decided against installing gas at a cost of £30k and opted instead for heat recovery and heat pumps and decent insulation.
She is now considering a £50k investment in solar. She says: “For an SME that’s not necessarily the best use of £50,000 because it takes so long to get payback. But when you see those energy prices going up, combined with the fact you already spend £20,000 a year on electricity, the balance quite quickly tips in the favour of solar technology.”
International corporation tax deal
Some 136 countries have agreed to enforce a minimum tax rate of 15% on major multinationals in a bid to ensure they pay a fairer share of tax.
The deal includes rules to force large companies with high profit margins to pay more in the countries where they earn money.
Companies with turnover exceeding €20bn will be required to allocate 25% of their profits in excess of a 10% margin to the countries where they operate, based on their sales.
The 10% profitability margin will be calculated using an averaging mechanism, based on profit before tax. The OECD, which hosted the talks, said the minimum rate could raise $150bn (£110bn) worldwide. The deal is expected to be finalised by G20 finance ministers next week, and then by G20 leaders at a summit in Rome at the end of October. The nations also agreed to a two-year ban on imposing new taxes on tech giants while the Biden administration tries to ratify the deal in the US.
Chancellor Rishi Sunak said: “We now have a clear path to a fairer tax system, where large global players pay their fair share wherever they do business.”
Ireland and other low-tax EU holdouts joined at the last moment. Of the 140 negotiating countries, only Kenya, Nigeria, Pakistan and Sri Lanka refused to sign.
BoE warns of “sharp correction” in stock markets
The Bank of England has warned of a sharp correction in global stock markets if investors take fright at rising inflation and poor growth prospects – known as stagflation. This risks sparking a cost of living crisis and destroying the value of assets, forcing central banks to combat the increases by raising interest rates. A report by the Bank’s Financial Policy Committee (FPC) suggested record high share prices reflected signs of higher risk-taking as investors searched for yield in a low interest rate environment. It added: “Asset valuations could correct sharply if, for example, market participants re‐evaluate the prospects for growth, inflation or interest rates.” The Bank also warned that small businesses in the UK had seen their debt levels increase by a quarter over the pandemic, versus a rise of just 2% for large firms.
BoE rate-setter warns of rise in interest rates
Bank of England Monetary Policy Committee member Michael Saunders has said markets were right to price in a rise in interest rates this year as the Consumer Prices Index heads above 4%. Mr Saunders pointed to labour shortages as the main driver for inflation stating that the labour market appeared tight across many sectors, pushing up pay growth. His comments come as economists warn that rising household costs through tax hikes and higher bills will curb consumer spending, slowing down the economic recovery. The Sunday Telegraph points out that rising interest rates will be a headache for Chancellor Rishi Sunak and lead to higher interest on the Government debt built up over the course of the pandemic.
Sterling has risen as a result.
Brexit
The Government are set for a potential clash with the EU on Northern Ireland this week as the U.K.’s Brexit minister will seek changes to the protocol that governs trade flows with Ireland. It comes as the government is facing a dispute with France over fishing rights. Last week, the U.K. hit back at France over a threat to Britain’s electricity supplies as part of the fishing row.
Oil
West Texas Intermediate crude oil futures have topped the psychological price of $80 for the first time since 2014. Rising on falling stockpiles, limited supply and rising gas prices ahead of the winter, oil look like continuing to rise in price.
Homeowners face steepest mortgage rate rise since 2008
Experts predict a 0.5 percentage-point rise in the interest rate on a new two-year fixed rate mortgage to 1.7% by the end of next year, adding almost £50 a month to the cost of paying off a typical £200,000 mortgage. The effective borrowing cost on all mortgages could be 0.8 points higher at the end of 2022 than it presently is, according to Samuel Tombs, economist at Pantheon Macro. This would mark the biggest surge in mortgage costs since the property market collapse in 2008. Geoff Yu, a macro strategist at BNY Mellon, added: “Household cashflow may not be in a position to take more hits, but that is exactly the risk posed by early hikes in quick succession. Variable-rate mortgages linked to the Bank of England base rates still comprise about a fifth of all mortgages outstanding – not insignificant.”
Consumer confidence dips amid inflation fears
A new report from PwC shows consumer confidence has slipped from the record levels seen earlier in the year. However, sentiment has returned to pre-pandemic levels and remains higher than at any point between 2016-19 following the EU referendum.
PwC consumer markets lead Lisa Hooker commented: “The inflationary factors that have triggered the decline in sentiment are unlikely to ease in the short term, particularly for grocery, utilities and petrol. Combined with the current problems facing those industries in relation to supply, we’re beginning to see it affecting consumers’ day-to-day lives and, in turn, sentiment and demand.” Hooker added: “For both retail and leisure sectors, the timing couldn’t be worse.”
Sunak urged to cut business rates to avoid high street crash
Landlords and retail bosses have written to the Chancellor calling for a cut to business rates to prevent a disaster on the high street.
In a letter to Rishi Sunak, business leaders said: “If there is no genuine reform of the business rates system, the occupation of commercial premises is going to become unaffordable to more businesses.” They went on to warn of more bankruptcies of major brands, “more closures of hospitality venues, more boarded-up shops, fewer start-ups and whole shopping centres abandoned.”
Melanie Leech, of the British Property Federation, which helped organise the letter, said: “The business rates system is undermining town centre recovery and poses a significant risk to the future of our high street businesses. Business rates have become so unaffordable, they are now hampering town centres’ ability to adapt, modernise and thrive.”
Exam grades worthless to employers
Recent grade inflation combined with falling standards in basic literacy means businesses are ignoring GCSE, A-level or degree results when it comes to hiring and are using their own assessments of recruits instead. A PwC poll of 150 HR directors of large companies for The Times Education Commission found three quarters of employers had to give new recruits extra training in basic skills including literacy and numeracy. Of those, nearly a third said they regularly had to, nearly half sometimes did, and only a fifth never did. Almost three quarters asked applicants to sit cognitive ability tests or online aptitude tests
Gupta to inject £50m into UK steel plants
Liberty Steel has secured a £50m cash injection from metals tycoon Sanjeev Gupta which it says will safeguard 660 jobs at its plant in Rotherham. The deal is part of a wider restructuring of GFG Alliance, Liberty’s owner, which was forced to seek funding when its key lender, Greensill Capital, collapsed. News of the move was welcomed by industry body UK Steel. A spokesperson said it was “really good news for not only the company, but those many thousands of workers and their families, the communities where those jobs a located and of course the whole of the UK steel sector”.
US jobs report
The US reported on Friday adding only 194,000 jobs in September while the unemployment rate fell to 4.8%. The growth was much less than expected as the Delta variant continued to drag on the economy. There were notable job gains in hospitality, retail and transportation, while employment in education declined, according to the US Bureau of Labor Statistics. The unemployment rate remains considerably higher than the 3.5% it was prior to the pandemic.
Tesla
Tesla chief Elon Musk told investors that the leading electric vehicle maker is leaving California and moving its headquarters from Silicon Valley to Texas, where it is building a plant.
N Brown
N Brown reported that first-half profit doubled as higher margin offset flat revenue growth. For the 26 weeks ended 28 August 2021, pretax profit grew 100% to £28.2 million year-on-year, while revenue fell 0.1% to £346.8 million.
Natwest
NatWest has entered guilty pleas at Westminster Magistrates’ Court to three criminal charges brought by regulator the Financial Conduct Authority (FCA) under money laundering rules. The bank admitted it had failed to prevent money laundering by an English Gold dealer who was allowed to deposit some £365 million, mostly in cash despite the dealer only declaring £15 million in annual revenues.
As the first British bank to admit to such an offence, Natwest has accepted that, between November 2012 and June 2016, it failed to comply with regulations to ensure they have adequate anti-money laundering systems and controls to prevent money laundering. As a result they will likely face a fine in the hundreds of millions!
Cabinet revolt over planned tax rises
A cabinet revolt is brewing over the Chancellor’s plan to increase corporation tax to 25% from the current 19% to help pay for pandemic spending. One cabinet minister told the Sunday Express: “We have got to stop doing what the bean counters want in the Treasury. They are looking in the short term and not at the longer-term strategic options.” Another senior minister sarcastically added: “I don’t understand how you can raise taxes and grow the economy, I’m not smart enough.” The minister added: “Tax is an attack on economic activity so raising taxes is bad for growth.” The minister said: “I just hope the Chancellor finds a way of cancelling that corporation tax rise. It will not be good for the country.”
UK behind in AI skills development
A report prepared by PwC for government ministers warns that the evolution of artificial intelligence could make the UK skills shortages worse. While AI should create jobs as well as displace them, the sectors most likely to see a rise in vacancies were those where the UK was already lacking in skills, the study said. The PwC report suggests investment in AI skills or skills in growth areas will not be enough to cope with the expansion of AI, adding: “Instead of simply promoting the skills needed today, many experts argue instead for promoting resilience and adaptation (‘learning how to learn’) because the process of upskilling is expected to become a more regular need for the majority of people.”
Middle-class households worse off under Tories
Analysis for the Telegraph shows a typical family with two children with one working partner earning £62,000 a year would have been left with £44,643 after tax back in 2010. From April, this will fall to £43,944 when National Insurance rates rise, according to figures from Blick Rothenberg. When “fiscal drag” is taken into account – wages growing faster than the thresholds for tax breaks – the impact is even worse.
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