Opening this week’s Bulletin, we look at the amount banks are setting aside for expected loan losses. We are in the High Street banks’ half-year reporting season and they are setting aside significant provisions for expected loan defaults. How could this impact you when looking for finance?
Although experiencing a fall in sales, the impact on small businesses is being offset by cost savings. We review a survey from Hitachi Capital Invoice Finance which reveal the top cost lines where savings are being made.
To close, we look at surveys from Lloyds Bank and the Federation of Small Businesses, one which reports businesses are starting to feel more confident, and the other revealing that business owners are still cautious about the next three months.
You can also read the Business Finance Bulletin transcript here…
Business Finance Bulletin 3rd August 2020
UK banks have set aside significant sums in anticipation of loan losses; how does this impact you? How businesses have been saving costs over the last few months; and mixed messages on business confidence… all of this in the latest Business Finance Bulletin
Bank Loan Loss Provisions
Let’s start this Bulletin with a topic I’ve never covered before. In the previous 308 episodes of the Business Finance Bulletin, I’ve never looked at bank profit performance.
Why am I interested this time?
Well, over the last seven to ten days, the UK banks have started releasing their half year profit figures, and there’s one figure that really stands out, that could impact on you. That is the amount of money that banks are anticipated to lose through loans going bad or not being paid.
The banks have been setting aside a new loan provision figure. This reflects their view on the economy and the amount they’re setting aside in anticipation of loans going bad is quite significant.
For example, Barclays Bank have set aside an additional £1.6 billion for anticipated loan losses.
Lloyds, they set aside an additional 2.4 billion.
NatWest, an additional 2.2 billion and Santander, £376 million.
In total, it’s just over 6 billion pounds of new anticipated loan provisions that the banks have set aside.
Now this excludes the Bounce Back Loans because we know the government guarantees a hundred percent of the Bounce Back loans. There’s been £34 billion of Bounce Back loans distributed, and 40% of that it’s about £14 billion of Bounce Back loans are likely to go bad.
How does this impact you?
I mentioned in a previous Bulletin, I think there’s a credit crunch coming in 2021. It’s clear that if the banks are anticipating significant loan losses, it’s confirmed their appetite to support small businesses with new debt is going to be very much lower. So what does this mean for you?
If you are looking to get extra cash in order to supplement working capital, you really have to be approaching your lenders early because you may not get the answer you want. You may have to look at alternative sources of finance, and this could take time if the market is contracting in terms of sources of finance. So, plan early.
Don’t forget, if you did jump quickly and get a Bounce Back loan of up to £50,000, don’t forget with the CBILs facility, which is a higher amount, you can actually include an amount to refinance an existing Bounce Back loan. So, if you apply for £150,000, £50,000 of that can go to refinance your Bounce Back loan. Use that window of opportunity because the CBILs facility closes in September. So, we can see there’s a lot of headwinds around. If you are looking to raise finance, plan early.
Business Cost Reductions
For the last few months, many businesses have seen sales and turnover going down, but many businesses have been able to offset the pain via reduction in costs and overheads.
So where have businesses been saving money?
Well, an interesting survey has come out from Hitachi Capital Invoice Finance. They found in this latest survey, 64% of businesses say they still have employees working from home, and naturally this does involve some cost saving for the business.
So where are these savings?
From the businesses surveyed,
53% of them said they are saving on employee food and drink;
48% saving on employee travel.;
45% on cleaning services
36% saving on catering for client meetings
and 36% say they are saving on rent and utilities.
So what’s the total amount on average that they are saving? Well, 70% of the firms said that on average, they are saving £840 per month; about £10,000 a year.
Not a small sum. It doesn’t offset the total drop in income, but hey, at least it does take away some of that pain.
The message is to continually review and challenge your costs Take a look at your bank statement, review all of the entries going out and ask, does that particular debit add value to my business or is it a cost that I can safely slash for now?
After all, it’s the businesses that have got a good control on overheads are the ones who will come out in a much stronger position.
Business Confidence Levels
Let’s close this Bulletin by taking a look at business confidence and the mixed messages that are coming out from various surveys.
First of all, Lloyds Bank’s monthly Business Barometer review. That showed some good news with confidence levels showing a month-on-month increase since the low in March. Also economic sentiment, that’s also increasing as well.
It’s good to see that some businesses are starting to feel a little bit more confident, but of course, that confidence level is well off the long-term average reported in that series from Lloyds Bank.
On the flip side, though, not such good news from the FSB quarterly Small Business Index. There, 23% of businesses surveyed said that the next three months is definitely going to be worse for them than the previous three months. So, there are some businesses that are looking ahead which feel well away from coming out of the danger zone. It just shows that many businesses are probably balancing on a bit of a knife edge.
If you’re in that position, don’t forget, it’s all about getting the right advice now, so please do reach out to your accountant and your other professional advisors. If you’re in the position where you’re not feeling that safe, of course, keep watching the Business Finance Bulletin and I’ll have lots of tips for you on how to make sure that you get yourself back onto an even financial keel.
That’s it for another Bulletin. As ever, I hope you enjoyed watching it, and if you did, please, don’t forget to give it a, like and a share.
That’s it. I hope you have a safe, successful, and healthy week and I look forward to being with you again next time.