“It’s equity stupid!” (part one)

Blow your trumpets loudly members of Enterprise Britain. I am able to tell you about a colleague who has stood up to one of Britain’s biggest banks.

This riveting tale was told to me during a game of golf at Aberdovey. I was playing in the Club Championships (don’t ask: nett 81). My partner explained that he is MD of a family business. They make flat-pack furniture. Life is tough. They have had a problem with a Chinese supplier, sales have fallen but their corrective action, including cutting staff numbers, is working.

They have banked with a High Street Bank for nearly thirty years and have never needed overdraft facilities, until now. They met with Bank officials.

Their response? “We require £15,000 to commission an accountant’s report.”

My playing partner’s response: “Get stuffed”.

So how did he cover his cash requirements? He visited his biggest customer (a well known mail order company) and asked them to pay their invoice 30 days earlier. They agreed. Problem solved.

If he could cure his tendency to hook his drive with the same dexterity he might win the Club Championship.

On the subject of banks Ruth Lea, the respected former Director of the Centre for Policy Studies, has written a useful article in ‘The Times’ (29.7.09). She explains why the Chancellor of the Exchequer’s rantings at Britain’s banks failure to support business customers are pointless.

Her article suggests that the weakness of the Banks’ balance sheets and their vulnerability to a further setback(s) (eg. bad debts) means that their cost of funds (the Banks’ gap between retails deposits and customer loans is £800billion) is much higher than might be expected from lower base rates.

I see it differently:

1. The Banks’ bosses want to earn huge bonuses.

2. They will do this through their investment divisions (eg. derivatives trading) fuelled by the coming bull markets.

3. They will be helped by the rich pickings to be had from over-borrowed mortgage customers, credit card holders and enterprising businesses.

4 . They will ‘play the game’ with Government, the Bank of England, the FSA and turn up for meetings with the Chancellor of the Exchequer.

The other key issue is that the Chancellor and most others are looking in the wrong direction. The solution lies in two directions:

1. The provision of economic, competent professional advice for enterprising businesses.

2. Government backed equity finance.

“It’s equity, Stupid” Part Two will be the subject of my next Blog.

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