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Credit Crunch Time in the North West

» Posted on: 4 February 2008
» Posted by: Andrew Livesey
» Service area: Business Support & Restructuring

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Andrew Livesey – who heads up Taylors business recovery team (which provides specialist legal support to insolvency practitioners and turnaround managers) looks at the implications of the Government Insolvency Service released figures in early February which showed a downturn in the number of company liquidations and personal insolvencies throughout 2007, compared to 2006*.

That’s not to say that 2007 hasn’t been without its problems for companies, but generally speaking, North West businesses have fared better than many expected, especially in comparison to other UK regions. This was illustrated in a recent report by Begbies Traynor, which showed that businesses in the North West suffered the smallest rise – 15.3% - in critical problems in 2007, compared to all other UK regions. At the top end of the scale the West Midlands saw a 43.1% increase. However, the build up of these problems fuels speculation that there will be an upward trend in insolvencies in the first part of 2008.

While the combined news from both reports is perhaps a reason for some optimism for companies operating in the North West, management teams should be careful not to grow complacent as we move into 2008.

There is a suggestion that the slow down in economic conditions and the widely talked about tightening of credit will lead to an increase in the number of companies running into problems throughout the year ahead. The combined effect of toughening market conditions is likely to have the greatest impact on the mid corporate sector, and businesses operating at this level are at the highest risk of business failure over the next twelve months.

A credit crunch, in particular, tends to negatively affect small to medium sized companies as these types of businesses are more heavily geared and often have no access to other sources of finance, such as private equity or venture capital. Companies operating in the transport and distribution industry in particular face a tough year as fuel prices continue to increase.

While the extent of public debate surrounding the national economy in recent months certainly poses a risk of the North West talking itself into a recession, the business community must not lose sight of reality.

The substantial increase in companies facing critical problems is a very significant indicator for the year ahead. There are, however, certain precautions that all business owners and management teams can take to ensure that their company minimises the risk of becoming a casualty in 2008. A proactive approach to planning for a market slowdown and more expensive credit is a must.

Troubled Waters
Once a company actually finds itself in a compromised position, it can be difficult for management to distance themselves from ‘fire-fighting’ day-to-day challenges in order to apply a strategic mindset to navigating the company out of troubled waters. Companies should seek help at the very first sign of a problem. It takes time to set up a rescue plan and find alternative sources of finance so by seeking advice early on, particularly when a company still has options, they maximise their chance of success.

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