A wake-up call went out yesterday (27 Mar) for undercapitalised small businesses. It came in an almost-throwaway remark by the eminent economist Frances Cairncross, on BBC Radio 4’s Today programme. (see below for link)

Bank reserves to be increased: how will it affect lending?

The programme asked if the new requirement for banks to increase their reserves will cause a reduction in bank lending to businesses. Cairncross thinks they will have less to lend, and so do many other experts, including the Brookings Institution in the US; also that this could lead to more expensive borrowing.

Businesses “living on the edge”

She went on: “There are a lot of companies, so-called zombie companies, which are clearly living on the edge, and for whom a rise in the cost of borrowing might be the last straw. There are some, I am told, which are living off the boss’s credit card. Those are probably companies that in the long run don’t have much of a future.”

[Well, dear reader, that group included yours truly in the mid-90s, until I bit the bullet. The zombie epithet isn’t flattering but it was a pretty good description of me at the time. “In denial”, another term in current usage, might well have fitted me too.]

The discussion continued and BBC presenter Sarah Montague asked:  “So it might be a good idea to clear them (those companies) out?”

Cairncross: “No, not necessarily a good thing. That would mean a loss of jobs. Keeping them on life support might be no bad thing.”

Three cheers for Frances Cairncross: an economist who thinks about people, not just numbers. That makes her an exception to the usual saying: “an economist knows the cost of everything and the value of nothing.”

Does the cap fit?

Is your business running on your personal credit card(s)? Mine was at one time; it kept me going for a while but eventually I had to bite the bullet, as those high borrowing costs pushed me ever-further into debt.

(As you probably know, the interest rate you’d be paying on a credit card is always massively above the historically-low and much-publicised Bank of England base rate.)

WANT TO KNOW MORE?

• Frances Cairncross interview, Radio 4 “Today”, 27 March 2013. LINK HERE  (scroll to 2hrs 46min 30secs). NB Only available for six days.
• Hopefully you’re not running a so-called zombie business. But if you are, or you think you might be, then you’re in exactly the same situation as I was. Read my book! LINK HERE