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Lessons from Japan for UK's struggling SMEs Lessons from Japan for UK's struggling SMEs
(5 months later)
The first three months of the year brought a 5.3% fall in the number of corporate bankruptcies. A fall is generally considered a good thing. A five-year low even better. No one wants to see businesses go bust, and besides, a decline must be a good indicator of an economy that is, to use George Osborne's favoured phrase, "healing".The first three months of the year brought a 5.3% fall in the number of corporate bankruptcies. A fall is generally considered a good thing. A five-year low even better. No one wants to see businesses go bust, and besides, a decline must be a good indicator of an economy that is, to use George Osborne's favoured phrase, "healing".
Alan Hudson, head of restructuring at Ernst & Young, thinks so.Alan Hudson, head of restructuring at Ernst & Young, thinks so.
The 3,619 business insolvencies in the first quarter of 2013, which is a decrease of 15.8% compared with the same quarter in 2012, should be considered "another sign that the UK economy is finally starting to move in the right direction".The 3,619 business insolvencies in the first quarter of 2013, which is a decrease of 15.8% compared with the same quarter in 2012, should be considered "another sign that the UK economy is finally starting to move in the right direction".
However, there is another way of looking at the figures. Stewart Baird, director of SME investment firm, Stone Ventures, says that while it is encouraging, "a relatively benign insolvency landscape should not be mistaken for an economy in a state of good health".However, there is another way of looking at the figures. Stewart Baird, director of SME investment firm, Stone Ventures, says that while it is encouraging, "a relatively benign insolvency landscape should not be mistaken for an economy in a state of good health".
He points out that the average liquidation rate over the past 25 years has been 1.2% of all active registered companies against a rate over the last 12 months of 0.7%.He points out that the average liquidation rate over the past 25 years has been 1.2% of all active registered companies against a rate over the last 12 months of 0.7%.
"Given the weakness of the economy, this simply doesn't stack up and could suggest the worst is yet to come," he says"Given the weakness of the economy, this simply doesn't stack up and could suggest the worst is yet to come," he says
Why would there be worse to come? The answer relates to the UK's zombie companies. These are the multitude of firms weighed down by pre-crash debts that only survive because banks roll over their debts from one year to the next.Why would there be worse to come? The answer relates to the UK's zombie companies. These are the multitude of firms weighed down by pre-crash debts that only survive because banks roll over their debts from one year to the next.
Often with hundreds of employees, they have no money to invest, can't emply more staff and stagger along spending most of their time worrying about the monthly cashflow figures.Often with hundreds of employees, they have no money to invest, can't emply more staff and stagger along spending most of their time worrying about the monthly cashflow figures.
This is the Japanese conundrum. Taxpayers, via the state-owned banks, keep thousands of small and medium-sized companies afloat in the hope that the rising tide of economic good fortune will allow them to set sail again.This is the Japanese conundrum. Taxpayers, via the state-owned banks, keep thousands of small and medium-sized companies afloat in the hope that the rising tide of economic good fortune will allow them to set sail again.
The trouble is that while this situation is ongoing investors refuse to inject fresh funds into the affected businesses. Without fresh shareholder funds, and in the absence of further bank lending, the businesses are unable to invest.The trouble is that while this situation is ongoing investors refuse to inject fresh funds into the affected businesses. Without fresh shareholder funds, and in the absence of further bank lending, the businesses are unable to invest.
There are benefits. Workers are, on average happier, because we can estimate that around 1-to-1.5 million people remain employed who might otherwise have suffered redundancy from bust businesses.There are benefits. Workers are, on average happier, because we can estimate that around 1-to-1.5 million people remain employed who might otherwise have suffered redundancy from bust businesses.
That is the chief benefit for the Japanese since the big property crash in the late 1980s. But as Tokyo has found, 20 years can quickly pass and the situation stays the same.That is the chief benefit for the Japanese since the big property crash in the late 1980s. But as Tokyo has found, 20 years can quickly pass and the situation stays the same.
Baird decribes the UK's situation as "artificial".Baird decribes the UK's situation as "artificial".
He says: "Over the past five years many of Britain's businesses have been in a protracted agony. In many cases, because of their financial position, banks haven't pulled the plug but this may change in the short to medium-term as their balance sheets strengthen."He says: "Over the past five years many of Britain's businesses have been in a protracted agony. In many cases, because of their financial position, banks haven't pulled the plug but this may change in the short to medium-term as their balance sheets strengthen."
Like many, he recommends loosening the constraints on bank lending. The Treasury makes a similar argument and the Funding for Lending scheme is supposed to make a difference. yet it is working against some fundamental forces, not least the new financial regulator, which appears to approve of strict lending rules to prevent a bank collapse that is unlikely for another decade. While this situation persists, banks will continue to keep the zombies on their feet staggering on, and on.Like many, he recommends loosening the constraints on bank lending. The Treasury makes a similar argument and the Funding for Lending scheme is supposed to make a difference. yet it is working against some fundamental forces, not least the new financial regulator, which appears to approve of strict lending rules to prevent a bank collapse that is unlikely for another decade. While this situation persists, banks will continue to keep the zombies on their feet staggering on, and on.
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