It is now clear this was just the tip of the iceberg and no commentator was able to foresee the full blown banking crisis that has exploded in the last fortnight with the collapse of Lehman Brothers, other US bank emergency sales/mergers, the $700 billion rescue package for Wall Street, and in the UK the Bradford & Bingley nationalisation. Other banks are also in crisis, Halifax Bank of Scotland, and the huge “banking to Insurance” group Fortis.

Northern Rock is like a pebble on a beach compared to these events and, as derivative contracts unwind in the coming weeks/months, no one can be certain of the effect this will all have on other institutions and the financial markets.

What next?

There is now a crossover of banks lending less combined with the onset of recession. Banks are very badly placed to cope with the economic downturn, significantly worse than in the recession of the early 1990′s.

Capital markets, the normal source of bank funding, are now virtually closed for business so Banks have to protect capital however they can. De leveraging – the process of reducing debt – has already begun taking place with the withdrawal of mortgage funding products and is extending through the corporate market place. There have been a number of shelved projects where bank support has been withdrawn and even the 2012 Olympic games has seen PFI support withdrawn in recent days.

The implications remain familiar

* Less lending – banks just do not have the borrowing capacity to support expanding loan books;

* More stringent lending criteria – there is a flight to quality in these situations;

* Prices higher – banks are paying a high price to protect their balance sheets, this is being passed on.

Businesses must be cautious. It is obvious but cash flow availability is critical to survival in these times, profitable businesses have failed in the past because they ran out of cash – that is exactly what has just happened to the banks.

Sensible actions for any business to take are:

• Check terms and conditions relating to bank facilities;
• If renewal dates are imminent bring forward discussions and secure required funding;
• Match expenditure to income generation wherever possible;
• Maximise the use of existing assets in terms of security value or cash release;
• Establish access to a reserve or contingency fund;
• Cost justify capital expenditure, only invest in areas of the business that have a realistic expectation of producing an acceptable return.

It is highly probable that trading and economic conditions are going to get a lot worse over the next year or two. Take action now to ensure your business is equipped to survive and prosper, maintain liquidity at all costs!

Peter Godwin
Managing Director
Close Brewery Rentals Ltd