Financial crunch time or market correction?

Recent news bulletins have been peppered with much talk of a credit crunch, stock market setbacks and mortgage market issues. All the indications point to tougher times ahead. But just how serious are the current financial market conditions and what are the likely implications for the average growing small business?

Watch the video with Chris Tilbrook - 'Refinancing in a credit crunch environment' (3 min).

Talk of a potential credit crunch began appearing in print this July with concern over the American sub-prime mortgage sector. During recent years sub-prime mortgages have become increasingly commonplace in the US and made a positive impact on home ownership. However, 17 consecutive interest rate rises later, house prices across the pond have begun to fall and defaults on these loans spiralled. This has driven a number of the major sub-prime lenders to bankruptcy.

So why should difficulties in the American housing market impact upon the wider financial climate? The global financial system is intrinsically linked; banks across the world buy complex packages of debt, which are dissected, repackaged and sold on to hedge funds, pension funds and other investors around the world. This has meant losses from the sub-prime sector being spread across the system, leading to significantly reduced funds in the debt markets and falls on stock markets.

But what does this all mean for the average small business in the region? A spokesperson for The Federation of Small Business recently said he would “not be surprised to hear of more small business failures” as banks take a more cautious view on lending and pass on increased borrowing rates to customers. Their concerns are echoed by David Frost, director general of the British Chambers of Commerce: “If big business is finding it more difficult to borrow, then clearly, investment decisions they make will be either slowed down or cut back. That will undoubtedly have an impact on smaller companies”.

In such a climate the relationship small businesses have with their bank will become increasingly important. Accessing funds to fuel growth will rely on continuing to hold open and honest discussions with the bank regarding borrowing requirements. From the banks’ perspective, crystal clear assurances will be sought as to the quantity, pricing and timescales of required funds and thorough due diligence will be crucial. Even so, not all banks are being affected by the ‘credit crisis’ to the same extent and there are opportunities for growing businesses to shop around for their debt requirements.

Although concerns for small businesses are well founded and further market wobbles may occur, most analysts indicate the situation reflects a correction to the previous excessive availability of debt and not a deeper malaise. Consequently, many believe the debt markets are likely to recover in the new year.

Overall, the region’s economy is in good shape and provided local businesses remain diligent in keeping their houses in order, they should not be unduly concerned about their financial affairs.