Round and round the mulberry bush..

I happened upon my dissertation , written in 1993, on the topic of small business failures and how to avoid them. I'm not claiming to be clairvoyant, but it's interesting to reflect how things don't change too much..

"The main sources of capital for small businesses suffer from the same problem, as they (the clearing banks etc) are all quoted companies. Given that banks lend other people's money (their depositors), but all losses of depositors' money are made good by the bank out of profits, the prospect of loss is relatively high over the short term, with consequent loss of investor confidence and reduction in share price. This is perhaps one reason why small businesses in this country suffer from short time horizons in financing the business.

The other ideology of wider home ownership was widely accepted particularly in the 1980's as house prices rose substantially over the whole country year after year. The policy was perceived as being extremely beneficial, as ordinary people found that they were getting wealthier and wealthier on paper as the equity in their homes grew. Lending criteria became more relaxed as the cover for any lending increased over time, as most lending for business was secured on the owner's house by way of second charge. Basic loan appraisal techniques of analysis of the business were discounted, as banks became readier to lend more and more. This led to better profits in the short term for the banks, all based on perceived good risk business with excellent security.

Businessmen were encouraged to attempt projects that their businesses may not have been capable of, as no cost benefit analysis or basic business plan was demanded of them before the bank would lend them the money to finance the project. Government fiscal policy at the time also contributed to the rise in credit taken, as the capital allowance and stock reliefs available could be largely financed on extended credit. The repayments, constituting a fixed cost, were not thought to be a burden, as continued growth in the economy and hence the firm, would soon see this extra outlay as a small and cheap price to pay for expansion and low taxation.

It is clear now what eventually happened. The boom years of the 1980's were followed by bust. The self perpetuating cycle of increasing house values, cheap and readily available credit and poor business analysis turned into a self perpetuating downward cycle as house prices fell, reducing bank security margins at the same time as interest rates rose reducing profits.

Banks, in an effort to mitigate losses, foreclosed on thousands of businesses, flooding the already depressed market with ever cheaper houses. Just about everybody in the country has been living with the consequences since the late 1980's, with some semblance of stability and growth being experienced in 1993 again."

And here we are again. Note the time scales particularly - late 80's, back to some sense of normality by 1993. About 6 years.

What have we learnt? This splits between people who were in business in the 1980's (and are still now - they've learnt quite a bit if they still exist now. And those thousands who never have experienced a recession before. There was an explosion in new businesses starting up in the late 90s and early 00s - things had never been so good, and money was easy to make. If you are still here, and suffering, better get some advice from someone who has seen it all before. Before you end up as a statistic, as frankly, there' s more pain to come, and a few years of it.