With the Government committed to tackling the country’s huge budget deficit through £80bn of cuts over the next four years, the fall-out will be hundreds of thousands of public sector job losses - as many as half a million according to the Office for Budget Responsibility. Although some of these job losses will be through the natural turnover of staff departures and voluntary redundancies, there will still be several hundred thousand people desperate to work made redundant.  

Time to press the panic button? Not at all, according to the Coalition Government. They are confident that the private sector, and specifically its SMEs (small and medium-sized enterprises), will be able to absorb these public sector job losses.

This does not reflect the still very delicate state of the economy, which, to the shock of the markets, contracted by 0.5% in Q4 of last year. Nor does it reflect what we ourselves are seeing on the ground. We deal with companies of every size and from every sector day in, day out, and for a large proportion of them things are looking very bleak indeed. The reality is that many thousands of businesses — in particular SMEs — are still struggling, hardly supported by the fact that consumer demand and confidence remains low.

When you consider that small and medium sized enterprises account for around 60% of the private sector workforce, the true extent of the problem we are facing becomes clear.

Unemployment set to rise
In both December and January, the Office of National Statistics announced that unemployment rose. Scratch the surface of the unemployment figures and you see that they have been distorted by a big rise in the part-time work force. They remained low throughout 2010 partly because many people are still in part-time jobs and partly because many others are on reduced hours — not because of an underlying health in the economy.

So, with SMEs reluctant to commit to recruiting people on a permanent basis while the economy remains fragile and funding restrictive, it is hard to see why they will want to commit themselves to taking on public sector workers.

What we’re seeing instead is businesses looking to have a degree of flexibility in their workforce, so they know they have the capacity to meet orders, but at the same time if orders dry up, they know they can reduce their head count at short notice. The last thought on their minds is expanding their workforce: survival is their priority right now.

Bank funding still an issue
Another big issue for the UK’s SMEs is bank funding. The banks are simply not lending in the way that businesses require.

Without working capital to grow and develop, how is it possible for companies to take on new staff? There are other options, of course, see ‘Alternative Sources of Finance’ box, but bank funding still remains the number one option for most businesses.

The fact that formal insolvencies have slowed down over the course of 2010 does not necessarily reflect a strengthening economy. This is merely due to the fact the normal drivers of insolvency are not there. The banks, creditors and even the Inland Revenue are not forcing companies into formal insolvency because they know if they do so they are likely to recover little, if any, of their debt.

So to answer the question as to whether the private sector can take up the public sector slack, the short answer is no. The Government is banking on the private sector to drive the economy forward, specifically the UK's SMEs, but a significant percentage of SMEs either lack the confidence to invest or are unable to secure the necessary funding from the banks or other institutions. Without money and confidence, just how can you grow?

Surviving tough times
Talk of whether the private sector can take up the public sector slack is, of course, a macro-economic issue. More pressing for many businesses at present is how to survive the still harsh economic conditions. If your business is currently suffering, delaying doing anything about it is seldom a good idea. Studies have repeatedly shown that many failed businesses could have survived if only remedial action had been taken in time. When the going gets tough, it may be time to call in the specialists. Working with ailing businesses, corporate advisory specialists aim to rescue a company either by helping to raise required finance or, if necessary, helping to reconstruct the business. They work with the directors, shareholders, lenders, and other stakeholders to find the optimum solution for all involved, with an emphasis on recovery.

Insolvency is generally a last resort, and whether it is a complex corporate reconstruction and recovery situation, receivership, administration, company voluntary arrangement, liquidation, or personal bankruptcy, early intervention is key to successful outcomes for all involved.

Alternative sources of finance
Although the Government and the banks have committed themselves to easing the funding difficulties caused by the financial crisis in the banking industry, in practice this is often no more than ‘lip-service’. Towards the end of 2010, David Cameron himself openly questioned why the banks still aren’t lending to businesses, specifically SMEs.

Fortunately, other  finance options exist for established businesses that are finding it difficult to obtain bank loans and overdrafts:

• Invoice finance is the foundation of asset-based lending (ABL), whereby money is advanced against a company’s assets. In the case of factoring, the most popular form of asset-based finance, the financier can collect debts on behalf of a business. Apart from invoices, other suitable assets can include stock, machinery and, of course, property.

• Peer-to-peer lending has recently emerged in the UK as a successful alternative, whereby private investors often lend directly via the internet, offering various types of loans from business to personal, without the requirement for a financial intermediary.

• Government grants have notoriously difficult application processes and can be complex to navigate, but there are genuine opportunities available for those who persevere.

• Enterprise Investment Schemes (EISs) are designed to help smaller higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies.

• Businesses of any size can use joint ventures to strengthen long-term relationships or to collaborate on short-term projects, while sharing the risk and costs with a like-minded partner.

• Business angels can often provide substantial investment in return for equity in the business, offering a direct involvement with that investment for business owners.

• Venture capital typically comes from institutional investors and high net worth individuals, and is pooled together by dedicated investment firms. A type of private equity, it is largely provided to early stage, high potential growth companies, often via a Venture Capital Trust (VCT).

• Investment from private equity houses frequently involves either an investment of capital into an operating company, or the acquisition of an operating company, typically in a young or emerging market.

• The lack of available bank finance has led some companies to consider getting a public quotation. Companies typically seek a public quotation because it offers profile, some liquidity for its shares, an audience receptive to growth and an environment where management can devote as much energy as possible to doing what their shareholders want them to do – to run the business. Available markets include PLUS, AIM and even potentially the London Stock Exchange.

Brian Johnson
T 020 7380 4989
E bjohnson@hwfisher.co.uk