With the UK economy expected to show a downturn during 2007 and 2008, and the credit crunch still effecting the UK financial sector, many businesses are begin to wonder if their banks will be there if they need short term support.  While banks have been generally supportive of small, medium and larger businesses during the good times, the indications are that the support may well be ebbing away.

Many analysts are forecasting multi-billion pound write-offs and write-downs over the next 12 months, as the effects of the credit crunch are played out for all to see.  There is currently much activity behind the scenes, with many of the major institutions desperate to salvage what they can from some of their disasterous investments.  While we are not looking at a Barings style fiasco, it seems that many of these financial institutions may have entered into agreements which they did not fully understand – derivatives, cut and splice policy elements and large gearing seem to be the underlying problems.

Even though the world wide economy is expected to slow over the coming months, normally there would be a degree of support from banks to ensure that solid, profitable businesses are able to trade their way through any slow down.  

However, with the banks all reigning in their investments at the moment there has been a collapse in the internal money market.  While this will not last forever, and will slowly return as confidence picks up, it may leave some businesses short of additional capital in the short term.

While the announcement today that the UK Treasury will guarantee all Northern Rock customer deposits has been fairly well received - probably a case of better late than never - it does beg the question, why have the government changed their policy? Are they aware of more bad news in the sector?

Properties bought for cash

As we have mentioned on some of our earlier posts, the main component of any financial market is confidence. As we are seeing now, confidence is easy to smash but not so easy to build back up over a short space of time. The move by the Treasury today, which effectively guarantees that all Northern Rock customer deposits are safe, surprised many in the market due in the main to the historic role of the authorities not to become directly involved in free market business.

Many in the markets are asking why they performed such a major u-turn, after only hours early indicating that they were not prepared to step in above and beyond the current compensation arrangements available. Do they know something that will rock the sector again? Are they so desperate to restore confidence that this is the only action they can take?

We have regularly seen authorities in the US use such a tactic to try and soften the blow of future shocks and disappointments, but this is the first time we would have seen such action in the UK, if this is the case. No matter how hard the government try, they are not able to convince the financial markets that the worst is over. Such major changes in policy can also upset markets, with suspicion and a lack of direction being pushed to the forefront.

Historically the UK has been, and continues to be, a hot bed of new business talent with a vast number of new businesses being set up each year, some succeed, some fail and some limp along.  However, one of the main problems which many new businesses experience is under funding.  There are a great number of business people who think that they need to cut down their starting budget to a minimum in order to be successful - this is not always the case.

In order for any business to have a chance of succeeding, the business needs to be fully funded.  True, there is always a need to cut out any surplus costs but there is no way a start up business will stand any chance of succeeding unless it is allowed to grow.  Many business people have been known to approach their banks for funding with a figure which is wholly inadequate and a recipe for disaster. You need to remember that no sensible bank would expect your business to break into profit from day one, a company needs to be nurtured like a young plant - given a firm base, encouraged to grow and watered frequently, with the end product of a blooming flower (or a successful business!).

To under fund your business from day one is a major mistake and drastically reduces your already borderline chances of success.   There are many banks who would not even consider the funding of a new business if they saw that the project was under funded.  Under funding leads to :-

· Less chance of being successful.

· Tighter trading conditions.

· Less breathing space to make the normal mistakes associated with a young business.

· A disheartened owner always fire fighting.

· Probably eventual closure

As strange as it may seem it is always advisable to ask for a little more than you expect when looking to fund a new business.  There are many highs and lows of setting up a new venture, but to experience the highs and the lows, you will need to be around - for that you need to be fully funded!