Businesses across the UK are benefitting from the favourable economic climate we are currently experiencing. With interest rates being held month after month, it makes sense that demand for corporate lending is increasing, as shown by the recent Bank of England Credit Conditions Survey.
It is certainly positive to see that firms have been able to access the finance needed to fund growth, and that default rates on loans to businesses are decreasing. That said, this low rate environment won’t be around forever.
An impending rise in interest rates is likely to push up the cost of firms’ repayments, and could also limit companies’ accessibility to loans in the future. There are also a number of wider economic risks, referred to as a “dangerous cocktail” of threats by George Osborne, which could potentially erode the favourable business environment, such as the global economic slowdown, and uncertainty around the UK’s position in the European Union.
These factors could potentially impact businesses’ profitability and costs in the future. Successful businesses are those that plan the future, and this shouldn’t just be limited to the internal projections for your business’ growth, such as your five-year plan, but should also include measures that mitigate against the risk of financial hardship in the future.
Many firms view growth plans with tunnel vision, without considering the impact that other factors outside of their control could have on their future growth, or indeed survival. Businesses should be prepared for all eventualities so that they may thrive whatever the weather, and are able to fulfil any repayment obligations they may have.
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With this in mind, there are some key considerations that businesses should make in order for firms to fortify against the potential impact both economic and human factors may have.
First and foremost, it’s crucial that business owners speak regularly with a financial adviser, who can identify issues or requirements that may have otherwise been overlooked, guiding them towards the most cost effective options and strategies available. Our research found that just under half of businesses have a financial adviser, meaning that many firms may not be making the most of finances.
This is particularly concerning considering that more businesses are taking out loans as startup capital, or to fund growth. It’s crucial that repayment methods for these loans are watertight. Startups in particular are vulnerable to dips in revenue, and it’s crucial that leaders have measures in place to fall back on should they find themselves short of cash.
Businesses, both large and small, are susceptible to this risk. With the looming prospect of an interest rate rise as well as global economic uncertainty, it’s important that businesses re-assess loans to ensure there isn’t the risk of default on payments if costs should increase, or profits fall.
Legal & General’s research found that 57 per cent of businesses have some form of business debt. Of the businesses who have borrowed money, 23 per cent did so with credit cards in 2015, compared to just three per cent of firms in 2011. Overdrafts are also common, and were used by 21 per cent of businesses which had some form of borrowing.
These types of unstructured loans in particular can cause difficulty if they aren’t repaid on time. If a key person was to fall ill or die, for example, an immediate demand for repayment is quite likely, making it crucial that businesses speak with a financial adviser about implementing measures to protect against this risk.
Many would expect that when a business arranges a structured loan with a bank, like a mortgage or formal bank loan, it would be advised on protecting that debt whilst assessing affordability. Our research, however, showed that this was not always the case with just under a third of businesses reporting that the bank which arranged its business’ finance never mentioned cover.
That translates into a significant number of companies may not be aware of the potential threats to the business. It’s crucial that businesses consider protecting against these risks, as debts could, in the wrong circumstances, put significant pressure on the company.
At Legal & General, we often monitor the wider economy to identify any forthcoming risks to our business, along with our clients’ businesses, to try and prepare for them, but in reality it’s impossible to predict what may happen in the future. Protecting the ownership, debt, and key people in your business is a great deal cheaper than you might think.
In a recent survey the general public thought that the cost of life cover was four times what it actually was. It is therefore crucial that you don’t put your business at risk by failing to plan for the unpredictable, and instead make an informed choice by speaking with a financial adviser.
Now you’ve thought about putting in place some protection for your business, why not take some inspiration from the sports field – it can be great for the boardroom.
Richard Kateley is head of specialist protection at Legal & General.
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