News

August 27, 2010

Small firms losing confidence and holding on to cash

Confidence among small businesses is down – but they are in a healthier financial position than at any time in the last three years, writes Simon Wicks.

According to the Institute of Chartered Accountants in England and Wales’ (ICAEW) quarterly Business Confidence Monitor, confidence among small businesses fell by roughly 20 per cent in the third quarter of 2010 so far.

Larger firms had a brighter outlook, but business confidence generally was down – mainly because of sharp falls in the south east and northern England, where business support is felt to be under threat.

The ICAEW’s head of enterprise, Clive Lewis, said the figures suggested the economic recovery would slow later this year. Yet more small firms were “cash positive” than at any time since the downturn started.

“Many firms are reporting larger profits,” said Lewis. “According to the British Bankers’ Association (BBA) , small businesses owe £4 billion in overdrafts and loans, but they have roughly the same amount in cash on deposit.”

Lewis suggested uncertainty about public sector cuts and a increased banking fees were limiting small firms’ willingness to invest in business growth. Instead, they are “husbanding their resources” until they see stronger signs of recovery.

“They are trying to pay back what they’ve already borrowed, or avoiding loans and trying to stay cash positive,” he said.

Both the ICAEW and the Federation of Small Businesses have identified higher bank charges as a barrier to lending. An FSB spokeswoman said: “Our members are finding that they are having to change the terms of their existing finance in order to get new finance. They’re not going to banks any more, but drawing on friends and family and their own savings rather than face punitive charges.”

BBA spokesman Brian Capon said: “There’s a mismatch between banks saying ‘We’re handing out £500 million a month to small businesses’ and small businesses saying ‘We’re finding it difficult to get finance’. Our banking taskforce is looking at why that is and what can be done about it.”

Lewis added: “Small businesses are at the end of the supply chain. It comes down to the consumer and whether they are debt constrained – and also whether bigger businesses get the confidence to invest and start paying their bills a little sooner.”

• The Forum of Private Business and Office of Fair Trading are inviting small businesses to take part in an online survey to find out how they are being treated by the major lenders.