Personal Finance Is As Vital As Business Finance In The Recession

I frequently come across examples of small business owners or directors who use personal borrowing to supplement their business cash flow

. This practise may not strictly be the right way to finance a business but certainly it has for a number of years, been the reality for many businesses.

Unfortunately due to the effects of the credit crunch, personal credit is now becoming much harder to obtain. As has been widely reported, lenders are being more careful when considering what and to whom to lend thus affecting the availability of both secured and unsecured loans. In addition, despite interest rates being their lowest since records began, the interest being charged by banks for personal loans is now higher than any point in the last 5 years at between 8-9% APR. This increase means that even if money is available, it is more expensive to repay.

Small businesses are less likely to get access to funds with personal borrowing being more difficult to come by. As a result, the life blood of their business dries up and all too often the business is unable to continue to operate. Increasingly businesses are therefore failing and with it the loss of a number of jobs.

In my view, this situation goes hand in hand with the problem of personal insolvency that we are currently experiencing in the UK. The Times on Sunday reported on the 23rd May 2009 a suggestion from the Citizens Advice Bureau that there may be many more people who are suffering personal insolvency in the UK than the official figures show. I believe that this analysis is absolutely correct. According to insolvency statistics published by the Insolvency Service, in the first 3 months of this year, just under 30,000 individuals were declared personally insolvent.

It should be noted, these figures only include formal insolvencies i.e. people who have declared bankruptcy or entered into an Individual Voluntary Arrangement (IVA). I believe a conservative estimate would be that for every person declaring formal insolvency, there are at least another two who are insolvent but dealing with the problem by using an informal Debt Management Plan (DMP). A Debt Management Plan is simply a gentleman's agreement between an individual and their creditors to reduce monthly debt repayments to fit within an affordable budget. There is no formal register of these plans and therefore no way currently to accurately measure the number of people who enter into them. If my estimation is correct, this would mean that an additional 60,000 individuals would have become insolvent in the first quarter of 2009 totalling 90,000 all together.

Surely the significant increase in the number of people suffering personal insolvency simply highlights the problems that are currently being faced by small business. Where access to cash is not available, increasing numbers of businesses are likely to go under. This will have a knock on effect of increasing job losses and the likelihood of personal insolvency for both employees and the former business owners and directors themselves.

Increasing the availability of business loans is clearly the Government's method of helping businesses. However, I believe that whether we like it or not, the life blood of small business is the finance that business owners take on personally in the form of personal loans and mortgage debt. Therefore, where these types of funds are not readily available, the difficulties currently facing small businesses are likely to continue.

by: Derek Cooper

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