I bumped into an old friend today. He runs what an economist would describe as a small business. He’s been in business for almost 40 years. He employs his two sons and a further 20 people, some of them part time. I wished him a happy new year, as you do in January. He response was blank. So I asked him how things were going. It turns out that he’s requested a meeting with his bank manager for next week. This is the same institution he’s banked with since he started in business, when I was still in short trousers.
“Unless they can give me an overdraft that enables me to run the business, I’ll have no choice but to close it down. I just can’t face another year like 2011 and all the signs are that this year will be tougher than last. My health can’t take another year,” he said. I asked if he expected the bank to give him what he needed. “They’ve turned down every request I’ve made over the last three years, despite a full business plan by my accountant that shows there’s no risk of the business defaulting. With their record, I’m not very optimistic”
He then said: “You’re a communications guy. What message should I give the staff and how should I tell the staff if that’s what I need to do?”
Over the last three years he has sold most of the assets he’s accumulated over four decades of working 14 hour days, including a holiday home in Spain which he bought for his retirement, and a Winnebago. Everything was sold at considerably less than the market value. But needs must – suppliers’ bills and salaries had to be paid, including pay packets for his two sons.
It’s not that his business isn’t a good business and potentially very profitable. His problem is that the banks won’t extend any credit. Without a reasonable overdraft to cover working capital, he needs to use his own cash flow, difficult for a small business and increasingly difficult in the current economic climate.
Because of this, he can’t take advantage of the wholesale prices that would allow him to make a sensible profit margin. He can’t raise his prices because that would make him uncompetitive. For him, and for thousands of other small and medium size enterprises, economic recovery and a happy new year are invisible horizons.
As taxpayers, we’ve bailed out the banks with considerably more than £65 billion. Our elected officials, who have an irritating habit of forgetting who they actually work for, didn’t seek our agreement in advance. It turns out they made a much worse investment decision than any bank would be making in giving my friend an overdraft.
Of course, the government put very tough covenants on the banks in return for the bailout. These included an end to outlandish bankers’ bonuses and a commitment to lend to small businesses, the biggest employers by volume in the country. Now, we know that the banks, having got the lifeline they needed, are not entirely focused in honouring the commitments they made in their hour of need. Why should they?
The banks hold the upper hand. The Government can’t get our money back at the moment because it’s worth about £35 billion less than we invested. Calling the debt in would effectively kill any prospect of economic recovery and any chance of a politician being re-elected in just over two years time. These are the same banks that are primarily, though not solely, responsible for the mess we’re in.
There was a time when we knew our bank managers. They lived among us, were pillars of our local societies and had discretion in how they ran their businesses. Today, banks are faceless and centralised and local branch staff have no more authority that the girl on the checkout at Sainsburys. Negative responses to customers to requests for borrowings are usually accompanied by an explanation that the ‘computer said no’, as if computers programmed themselves.
Lloyds Bank took out adverts to celebrate having lent the amount of money to SMEs that it agreed to under the terms of the bailout, but Royal Bank of Scotland failed in its contribution by £2 billion in three months. RBS’ woes, we should remember, were entirely of its own making, the result of a Board of Directors that believed their own publicity led by a CEO who was either corrupt or incompetent, or maybe both. Whoever first thought up the image of the piggy bank had foresight beyond their years.
Vince Cable, our business secretary, regularly threatens to take tough action. But tough talking is easy. The banks know there’s very little he can actually do, except perhaps impose an extra tax on the banks. This, if enacted, would serve only to delay any prospect of repaying the taxpayers’ emergency capital investment.
Meanwhile, my old friend, an honest and hard-working businessman who has always paid his tax and religiously paid back his borrowings, can’t sleep at night worrying about the year ahead, fretting about the livelihood of his staff and tormenting himself over the future for his sons and their families.
The only advice I could give him about what to say in the event was to be honest and open. Let’s hope for all of them, and hundreds of thousands more, that the invisible horizon comes back into view sometime soon.
2012. Happy new year.