Remaining recession risks - and how to avoid them

The UK is recovering, according to George Osborne.

In a speech this week the Chancellor insisted that the economy is “turning a corner”, and that the government’s strategy has been vindicated.

But this is not the experience of most UK small businesses. A survey from insolvency body R3 found that the majority of small firms disagree with the Chancellor’s prognosis, with more than a third reporting that they are distressed by at least one key measure.

It is clear that risks remain for the UK’s small businesses. But what are those risks, and how can they be negotiated?

Availability of credit

Paucity of credit remains one of the key problems with which the UK’s small businesses are faced. Although the banks maintain that they are ready to lend, this week new figures from the Federation of Small Businesses revealed that nearly half of all business loan applications are rejected – despite the Bank of England extending cheap credit to banks with the intention that it will be loaned to small firms.

There is a number of ways in which business owners can potentially deal with the ongoing credit squeeze. The first of these is to ensure that you are not unnecessarily dissuaded from seeking credit. If the banks are to be believed, good applicants will still be accepted. Secondly, though, if you need to borrow you should consider alternative, non-bank methods of finance. You can read more about potential funding routes in our guide to small business finance.

Interest rates

The Bank of England recently issued “forward guidance” insisting that base rates would not rise until unemployment dropped to 7 per cent. Some commentators read this as good news for small businesses, that will help them to plan their borrowing with confidence.

In reality, though, this may not be quite the reassuring news that it first appears. To begin with, this is not a time-based guarantee; small businesses have no way of knowing when the unemployment target might be reached – and it is worth noting that the jobless figures fell this week. Secondly, as all business owners will know, base rates can often seem to have little bearing on the amount you actually pay to borrow. The average business loan currently has an APR of around 12 per cent. Read more about interest rate planning for small businesses.

Bad debt

It is not just your own financial pressures to which you need to pay attention. In addition, you should be aware that your clients and customers may be experiencing their own difficulties, as may your suppliers. You need to take steps to protect yourself against the potential impact of those difficulties.

You should carefully consider whether or not you choose to extend credit to clients. Your decision will in part be based on the norms in your specific industry, but you should also assess your clients on a case by case basis. You might choose to use credit checking as a means by which you determine whether or not to offer credit, and on what scale.

You also need to assess the risks posed by your suppliers. What impact would the failure of one of those suppliers have on your business? How can you mitigate that impact? Do you need to investigate other options? You might choose to use publicly available information, for example from Companies House, to help you make that assessment.


Customer concentration is a high risk for many businesses. If you have a small number of large clients, the worst case scenario is that one or more of those clients decides to change supplier. This could have a very significant impact on your financial viability.

You can mitigate this risk with a two-fold strategy. The first and most obvious step is to try to broaden your client base. Clearly this is difficult during periods of depressed spending, but you might try to bring in more business by, for example, discounting your services. The second step is to attempt to enter into long-term arrangements with your clients, under which you mutually pledge to do business on specific terms for a minimum period. Again, this might require you to discount in order to secure an agreement, but it is also worth noting that firms may be willing to enter into long-term arrangements in order to get a better handle on their own cashflow, so be ready to negotiate.

Unpredictable spending patterns

Finally, as the last five years have shown, periods of economic uncertainty can lead to unpredictable spending patterns. While spending has been widely depressed until this point, many commentators are banking on a pumping up of consumer expenditure as the economy supposedly recovers.

This presents both opportunities and risks for business owners. Clearly, higher levels of spending are better for most businesses (the exceptions including, perhaps, consumer-facing firms that specialise in discounted necessities). However, betting on a sudden spike in spending is likely to be risky. The vaunted recovery is, if at all materialising, still very much in its nascent stages, and per capita wealth is still significantly down. On the other hand, a sudden glut of orders could place severe pressure on firms that have not properly managed their stock. Small businesses therefore need to prepare for every eventuality.