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

Payday loans are in the news again. In just the last week I’ve seen headlines like these in the press and the BBC:

“Payday lenders face accusations of illegal activity”

“Payday loan firms face threat of instant closure.”

http://www.news-panel.com/news/bbcbreaking-uk-payday-loan-companies-given-12-weeks-to-stop-irresponsible-lending-or-risk-losing-their-licences-httptcopjnkfnegje

These firms get bad press and in many cases that’s deserved. When the loans “roll over”, the companies make obscene amounts of money, with massive interest rates; and their customers end up in a vicious circle of ever-increasing debt.

After much criticism for inaction, the OFT (Office of Fair Trading) here in the UK has taken 12 months doing a study and has given the firms 12 weeks to clean up their act. Those that don’t could be “shut down immediately”, we read.

Two questions:

• If it took the OFT 12 months simply to find out what was happening (most personal finance commentators knew already), how realistic is it to expect all these companies to change their practices (and to prove they’ve done so) within 12 weeks?

• If firms are closed down, what happens to borrowers who rely on them and can’t get loans from anywhere else? Even viable businesses have a hard time getting funding from banks; what chance have individuals with poor credit history?

According to the companies, 80% of the loans are in fact repaid by the following payday. If that’s true, then for those borrowers it was an affordable solution, maybe their only solution.

So I still say “yes and no” on the fast shutdown plan.

Or, as today is Red Nose Day here in the UK, I should quote Vicky Pollard: “yeah but no but yeah but  …”

COMMENT IS FREE!!

Have you used a payday loan company? How did it work out for you?

This is our first guest blog. It’s from Miss Silver Screen Suppers, who lives in London  (details below) and it’s wonderful!

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Payday arrived.  I was getting a big fat bonus and had promised myself that I’d give myself a treat – the new Ottolenghi cookbook.  I checked my statement after my salary including bonus had cleared.  I was £27 in credit, the cookbook from Waterstones was £27.  Magic.  My current account started the financial month at ground zero.

 A few days later I got a letter to say that my rent was going up by £87 a month.  Holy Hannah.  Every month I get deeper and deeper in debt so how on earth am I going to find £87 a month more?  I guess there are two ways:

 1 – try to bring in some extra dough.

2 – try to economise.

I have ordered a copy of Michael’s book from Amazon and I hereby pledge to follow EVERY piece of his advice and report how I am doing once a month.  I have been living beyond my means for many, many years.  Time to wise up.

So here is where I am at on the beginning of this journey.

My debts total £6505.99 (my credit card bill plus the amount I was overdrawn when my salary went in) and I am aiming to reduce this debt slowly but surely every month.

My aims for March.

1 – stop drinking alone – this is going to save me a fortune!

2 – start listing things on ebay – I am going to try and make £100 this month.

3 – try and cancel my 12 month eharmony membership – all the men I am being matched with are BONKERS and this is costing me £40 a month.

Will report back!

Miss Silver Screen Suppers – http://silverscreensuppers.com

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Many thanks to our guest blogger for her honesty. This post is written with the humour that’s so characteristic of her “Silver Screen Suppers” blog.

Watch this space for monthly updates!

WANT TO KNOW MORE?

About my book: http://getbacktotheblack.com/books/

About Silver Screen Suppers (“Eating and Drinking Like the Stars of Yesteryear”):  http://silverscreensuppers.com

There have been calls in the press for Brits to “get the savings habit”: a habit that many of our parents had (or grandparents, depending how old you are, dear reader) but which we’ve lost along the way.

But if we decide to save, our next question might be “where do I invest my hard-won savings?”

That’s why I wrote recently that saving was a worthy thing to do; but that another option was to use any “discretionary income” we have, to pay down debt. As the saying goes (according to the Daily Telegraph): “Paying down debt … is the best tax-free, risk-free investment in town.”

There was more on this in a great piece yesterday (1 March 2013) by  Sean O’Grady of The Independent. It reminded me that I’d forgotten the “fun” aspect; that’s why shopping will for many of us be the most attractive option. His headline was “Shopping gets in the way of saving” and he says, even on the relatively mundane activity of food shopping:

“One of the most benign things that has happened to suburban Britain in the past 10 years or so has been the emergence of Tesco Metro, Sainsbury’s Local and the rest, which at least provide the option of a fresh apple or raw carrot in what used to be “food deserts”. For that alone, we should forgive them the horse-meat mistakes. As the current TV series chronicling the life of Mr Selfridge reminds us, we love shopping as a leisure activity in this country, and have done so for a very long time.

Contrast that with financial services. This is no one’s idea of fun. We know, instinctively, that providers of investments rip us off; annual charges, entry fees, financial advisers’ fees and all the rest of those little humiliating scams make us rightly suspicious of investing in even the soundest unit trust, investment trust, open-ended investment company, or whatever.”

O’Grady is right; no-one’s idea of fun. All those trip-wires he so graphically describes are indeed worrying.

So … “paying down debt remains the best tax-free, risk-free investment in town.” I rest my case.

PS You don’t have any debts? Good for you; but maybe you’re reading the wrong blog.

WANT TO KNOW MORE? Read my book!

A recent study by UK financial services company Scottish Widows says that many Brits don’t make any attempt to save for the future; many have no savings at all. Their message is clear; reintroducing the savings habits of earlier generations would be a prudent step for many people.

I won’t argue with that, with one exception. If you have significant debts, then paying down those debts is more prudent than building up savings, especially as those savings will earn tiny rates of interest compared with the interest you’re paying on your debts; and tax has to be paid on that interest anyway.

For more on this topic, see my earlier post of 27 Jan 2013.

Another view on the renting vs. buying debate has been published by the Halifax Building Society in the UK.

Martin Lewis of Money Saving Expert said recently on the BBC that too many people overstretch themselves in order to buy, sometimes settling for an interest-only mortgage (see my recent post on that aspect: LINK);  and he commented: “renting is not a dirty word.” However, according to Monday’s copy of The Independent’s budget edition the “i” (by “budget”, I mean 20 pence: that’s what we’re about on this site), the Halifax has published data showing that renting is more expensive than buying, by an average of £120 / month through the UK, with the largest difference (£193) in London.

The “i” report said: “Latest figures from Halifax show that buying a property in the UK is more affordable than renting.”

If I were a cynic, I’d say “the Halifax’s business depends on lending money for house purchases, so they would say that, wouldn’t they?” But I’m no more than averagely cynical, so I wonder what costs were included in the costs of ownership. So I shall investigate.

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Investigation part 1: as you’ll see from the comments in the link below, the “cost of buying” probably (I’m not 100% sure) assumed a very low mortgage interest rate – around 2% is achievable now – but only if you have a very high deposit,  maybe 35-40% of the purchase price, which is out of the question for most people. Certainly out of the question for first time buyers; and that’s the group that would be most interested in the “shall I buy or shall I continue renting” debate.

Memo to self: “investigate further!”

WANT TO KNOW MORE?

For more on the Halifax report, click HERE.  It’s from a regional newspaper : I can’t find the report via the Halifax site.

Last week I quoted Martin Lewis, the “MoneySavingExpert”, who was talking on BBC Radio 5 Live on the renting vs. buying question. He said: “Renting is not a dirty word. People in this country think renting is throwing money away, but often if they can’t afford a repayment mortgage they get an interest-only mortgage. And they don’t consider that to be throwing money away!”

Now recent research from asset management data firm xit2, quoted in the London “Independent”, has shown that of 1.3 million interest-only mortgages set to mature by 2020, about one million do not have a repayment plan in place.

Mark Blackwell, MD of xit2, says: “If lenders fail to help these borrowers find a repayment vehicle, it will come back and give them a nasty bite around 2020 when the big batch of high-LTV interest-only loans granted in the mid-2000s mature.

“Eighty per cent of these borrowers have no repayment plan. Plenty of those will be families on tight monthly budgets, with low household earnings and little to no life savings. Many of these borrowers won’t be able to pay off their mortgage before it matures and will be stuck in arrears.”

But, it seems, only a few lenders are alerting borrowers to the looming financial calamity as their mortgage matures, being unable to remortgage and still owing a huge capital sum on a property that may even be worth less than they paid for it.

Advisers say those on interest-only mortgages should review their situation and, if necessary, take immediate action to lessen any financial hit. Philip Bray from investmentsense has seen a steady increase in the number of clients coming to him with a hefty interest-only mortgage hangover. He says: “First things first, consider moving to a capital repayment plan, and use other assets to repay the debt. You could downsize, and purchase a smaller property from the equity in their home – admittedly this isn’t an option open to all.”

If the borrower is near retirement – and the Financial Services Authority says many are – more drastic action may be necessary: “They could use the tax-free lump sum from their pension to repay, or pay down some of, the debt, accepting the fact that they will have a lower income in retirement.”

Want a copy of the whole article from the “Independent”? CLICK HERE

Could this affect you? If so, get in touch.