Personal Finance is as vital as Business Finance in the current economic climate
I have come across many examples of small business owners or directors who use personal borrowing to supplement their business cash flow. Unfortunately due to the effects of the credit crunch, personal credit is now becoming much harder to obtain. What can be done about this…
I have come across many examples of small business owners or directors who use personal borrowing to supplement their business cash flow. This practise may not strictly be the right way to finance a business but certainly it has for a number of years, been the reality for many businesses.
In the current climate due to the effects of the credit crunch, it is getting more difficult to obtain personal credit. As has been widely reported, lenders are being more careful when considering what and to whom to lend thus affecting the availability of both secured and unsecured loans. In addition, interest being charged for personal loans is now higher than at any point in the last 5 years, despite interest rates being their lowest since records began. This increase means that even if money is available, it is more expensive to repay.
Small businesses are less likely to get access to funds with personal borrowing being more difficult to come by. As a result, the life blood of their business dries up and all too often the business is unable to continue to operate. Increasingly businesses are therefore failing and jobs being lost.
The Sunday Times reported on the 23rd May 2009 a suggestion from the Citizens Advice Bureau that there may be many more people who are suffering personal insolvency in the UK than the official figures show. I believe that this analysis is absolutely correct given the problem of personal insolvency that we are currently experiencing in the UK. According to insolvency statistics published by the Insolvency Service, in the first three months of this year, just under 30,000 individuals were declared personally insolvent.
However, these figures only include formal insolvencies i.e. people who have declared bankruptcy or entered into an Individual Voluntary Arrangement (IVA). I believe a conservative estimate would be that for every person declaring formal insolvency, there are at least another two who are insolvent but dealing with the problem by using an informal Debt Management Plan (DMP). A Debt Management Plan is simply a gentleman’s agreement between an individual and their creditors to reduce monthly debt repayments to fit within an affordable budget. There is no formal register of these plans and therefore no way currently to accurately measure the number of people who enter into them. Using this information I would estimate this would mean that an additional 60,000 individuals would have become insolvent in the first three months of 2009 totalling 90,000 all together.
Surely the significant increase in the number of people suffering personal insolvency simply highlights the problems that are currently being faced by small business. Where access to cash is not available, increasing numbers of businesses are likely to go under. The knock on effect of this is increasing job losses and the likelihood of personal insolvency for both employees and the former business owners and directors themselves.
Increasing the availability of business loans is clearly the Government’s method of helping businesses. However, I believe that whether we like it or not, the life blood of small business is the finance that business owners take on personally in the form of personal loans and mortgage debt. Therefore, where these types of funds are not readily available, the difficulties currently facing small businesses are likely to continue.
Resources:
Derek Cooper is Managing Director of Cooper Matthews Limited http://coopermatthews.com
More information to help resolve directors personal financial troubles http://www.company-debt.co.uk/I-have-personal-debt–What-should-I-do.html
Cooper Matthews specialise in Company Debt Advice giving straight forward insolvency advice for businesses and directors with financial problems. They have significant experience in working with small to medium sized businesses.
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