THE huge bank write downs on bad assets and the need to bump up capital levels has seen a squeeze on bank lending not witnessed for generations.
While many larger companies can look to boosting their liquidity through equity releases, smaller companies, privately owned businesses with no bank of shareholders to turn to, are looking elsewhere for cash.
The Government through its various agencies, including One North East, is proving a vital source of funding for many regional enterprises.
The region’s accountants are also stepping up their game and finding they are spending an increasing amount of time helping businesses secure additional investment.
Paul Duncan, corporate finance director at the Newcastle office of chartered accountant Haines Watts, said: "The recession has impacted hard and fast on the ability of businesses to fund their activities."
Companies are hoarding cash, chasing creditors hard for payment, taking advantage of the Government offer to defer VAT payments and even turning to families and friends for vital reserves.
Mr Duncan said one of the challenges facing the region’s corporate finance teams is pointing clients in the direction of the help available, with the public sector proving more accommodating than the private sector for now.
Mr Duncan continued: "We are spending an increasing amount of time helping businesses secure funding. For some businesses, better working capital management may be the whole of the solution, but for many, external funding is required."
One North East recently launched its Real Help For Business campaign and has made over £25m available to the region’s companies since September last year.
ONE Chairman Margaret Fay said: "There has never been such as concerted effort by the public sector to provide vital support to businesses and people.
"We are investing £46m over the next two years to help them deal with the effects of the recession, in addition to our normal business support activities."
A recent survey by Close Invoice Finance discovered that thousands of North East SMEs are turning to family and friends for cash rather than the banks.
Less than 6% of SMEs said they were confident their bank would extend them credit into 2009 compared to 73% of those polled last year.
David Thomson, chief executive officer of Close Invoice Finance said: "The relationship between banks and SMEs has collapsed with severe repercussions for the sector as a whole.
"As the recession takes hold, the adage ‘Cash is king’ has never been so true. SMEs need to be far more creative in how they source working capital and deadly serious about tackling late payment."
Banks have also been urged to take a tolerant line with cash-strapped businesses, as they struggle to stay afloat in the economic downturn.
The call came from the Institute of Chartered Accountants in England and Wales (ICAEW), which wants the banks to do more to support basically sound businesses hit by temporary problems.
Research by the ICAEW shows that overdrafts are the most common form of finance for all sizes of business, followed by leasing/hire purchase and term loans. With 96% of overdraft agreements for micro-firms and small companies up for renewal by the end of 2009, the ICAEW is asking for the banks to show more understanding of their needs.
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