Gordon Brown a Scotsman , widely described as Prime Minister and First Lord of the Treasury told Andrew Marr on TV this morning ...
'The first thing we're thinking about is how we as a Government can help the flow of money to businesses, how we can get the banks doing what they said they would do after the recapitalisation, and that is maintaining the level of funding for small businesses and mortgages that happened in 2007, which was a very high year.Over on BBC4 his Mr Darling another Scotsman spoke to the World this Weekend" and said
'When I announced our original plans in October, I said it would be necessary for us to continue to take whatever measures were necessary to ensure that we get lending in the system. Over the next few weeks we will continue to discuss with banks what further steps we can take that would help lending, particularly to small and medium-sized businesses.This gormless pair of twats, and their advisers, the double firsts from Oxbridge crowding the corridors of Threadneedle Street and jostling the elbows of Mervyn King fail totally to understand how , what economists like to call SME's (small and medium sized businesses) are financed.
'We have got to make sure these banks are strong enough in the first place - in other words, to help that recapitalisation process....we also have to ensure there is enough money in the system so that businesses and people looking for mortgages can get the money.
Most (but not all ) manufacturing and trading concerns have limited liability, that is the shareholders have limited the liability to their creditors by the amount of issued and full paid up capital.
So if a company has 100 £1 shares issued it's ultimate liability is £100.
There are (ish) some 1Million Limited Liability companies in the UK (inc Wales, Scotland and NI) . Say only half are active. Of those, any bank manager , accountant, insolvency expert will tell you without hesistation that at least half are hugely undercapitalised.
Indeed this is the curse of industry.
So how do they survive. Well principally by the skin of their teeth.
The capital base of a typical small business say up to £5 MN turnover is.
1. Share capital. When the business started (probably not by a businessman but a couple of people with a bright idea, little money and lots of energy) they set up / purchased an off the shelf a company, changed the name and issued two fully paid up shares of £100. Even Erinys the curious and secretive security company that has picked up major multi million pound MOD contracts in Iraq (and was involved in the balonium scare through their contacts with UK citizen Mr Berezovsky) has only £100 of capital and 2 fully paid up shares.
2. Working capital would be ;
A.Personal savings lent to the company as a Director's loan. There may also be loans from wives, parents, friends.
B. A bank loan secured probably on their house(s). To have belt and braces the bank would make this a "joint and several" loan, let's say of £10,000.
So our tyro businessmen think they each stand for £5000 each. WRONG, "joint and several" are one of the many inoccent looking hurdles to trap the small businesman - it means if one person securing the loan defaults , the other takes on the burden of the whole of the loan repayment.
C. Once trading they can obtain (not easily and almost impossible for a new business in the current climate) trade terms or credit from suppliers. They also have to offer credit to their customers - impossible to trade if not offered. It is not uncommon that creditor exceed debtors by a factor of 5 - in fact their company is funded by their major suppliers!
D. Once established as a going concern, they discover from their accountant they can borrow money in other ways ;
Leasing or lease hire of vehicles, where they never actually own the asset and if they fail to pay the asset is recovered by the lessor. 90% of company vehicles in the UK are leasd - you can lease anything, furniture, computers, pictures, carpets....
Typically such businesses do not build up capital assets, if they do, their nett worth is probably 10-20% of their declared value on the balance sheet.
So the bank will see that the overdraft, whilst serviced as agreed is always bumping up against the limit and will prove resistant to extend the size of the loan unless some more security is available.
So our businessmen get good at milking supliers for credit and bearing down on customers to pay.
Then after the lying bankers disclosed how frail and fraudulent their balance sheets really were - credit hit the buffers for everyone and suppliers clamped down.
All of a sudden they have no money to pay the year end VAT Bill, the January date for personal tax, Corporation Tax,is almost on them, and the financial year end at end of April is looming.
The leaseholders on the wife's car is getting shirty... although she is on the books her notional salary went months ago.
They can't get the bank to extend the loan and they are asking / demanding tougher terms. Why shouldn't they ? Not only have they no money to lend, they know from experience that the company is basically insolvent.
Insolvency has two tests.
1. The companies assets are exceeded by their liabilities.
2. The company cannot meet payments when due.
Their accountant tells them that the law requires them to call in an insolvency expert.
Figures are tossed about of an impending 35,000 companies closing in the next 6 months. That sounds like a conservative view.... whatever clever fucking scheme Brown / Darling and the wizards of the Treasury and Threadneedle Street whizz up.
...and don't expect Cameron and the Bulingdonites to come up with any answers either. This just has to work out through the system.
See Roto Rooter Economics
Also as a an example of joined up thinking, there is curently a perverse, incentive whereby companies in liquidation (they are kaput, finito, dead like this parrot ) are exempt from empty property rates while those in administration (ie they may phoenix like arise again) are not.
It is of course not unusual now for property owners to remove the roof to avoid empty business rates when their tenant has folded, moved on as it is ion the current market unlettable and unsaleable.