Unbelievable - why is the government destroying businesses?

[jim_gold]

Here is the tale of a fundamentally profitable 50 yr-old construction company, that is effectively being wound up by the government because of a very short term cash flow problem.

Wrekin Construction Group has gone into receivership today with the immediate loss of 530 jobs.

RBS (the government bank) has frozen the company's bank account, stopping the company paying back from other accounts some of the £2.8m overdraft the bank has suddenly recalled.

They have £1m arriving in the bank later this week and £40m of secured forward orders this year.

I am not saying the government should be bailing out distressed companies, however I object to the cavalier approach of the government-owned bank continuing well after it engineered its own demise as a private company.

This is an example that should go straight to House of Commons.

More on this business here.

 

[Norseman]

Scary. I believe that these kind of things can be prevented by having excellent Relationship Managers that know and understand their clients financial position and business thoroughly, with a management structure giving them the opportunity to have the final say on pulling the plug on any banking facility.

Without good banking facilities how can the government ever expect companies to be able to grow again?

 

[An Oasis]

Scary. I believe that these kind of things can be prevented by having excellent Relationship Managers that know and understand their clients financial position and business thoroughly, with a management structure giving them the opportunity to have the final say on pulling the plug on any banking facility.

That assumes that the banks have staff of the right calibre in the first place. Not my experience of late. I suspect the internal memos are to retain cash at all costs, as the banks are as jittery as everyone else. Whilst they have been bailed out their long-tem aims will be firmly fixed upon repaying the loans and becoming private entities once more.

 

[scudulike]

Same thing as I understand it with Northern Rock - to meet govt targets they are being more agressive with repossessions. Makes you wonder who's really making out of this whole bailout thing....

 

[FireFleur]

http://www.youtube.com/watch?v=7upG01-XWbY

 

[Chris Ashdown]

Do you all fully understand the companies finances, or just relying on a quote from the company chairman who is a bit put out at this time

Banks do not just close down without full risk assesments, 40 million sales this year do not mean profit, I million being banked next week, does not mean other payments are not due to be paid out of it. he does not state he is reducing the overdraft by 1 million

only the company and administrators know the full story

 

[BeautyScientist]

Do you all fully understand the companies finances, or just relying on a quote from the company chairman who is a bit put out at this time

Banks do not just close down without full risk assesments, 40 million sales this year do not mean profit, I million being banked next week, does not mean other payments are not due to be paid out of it. he does not state he is reducing the overdraft by 1 million

only the company and administrators know the full story

A very good point and it is easy to get carried away about anecdotes like this. Closing this particular business might well have been the best thing for everyone involved: we just don't know the facts.

But there is one thing we all know: RBS has failed as a business. The people who were in charge when it failed should not be in charge and responsible for decisions like this one now.

 

[jim_gold]

Chris Ashdown & BeautyScientist both make valid points; we do not know the full facts in the case. We do know the directors of the company were surprised and disappointed to have been put so suddenly into administration.

Which is not to say that armed with all the necessary information, a diligent bank manager would not have decided that the company ought to be placed into administrative receivership in the best interests of creditors, staff and shareholders.

From what we have found out, RBS had been reportedly uncommunicative in the period up to the administration, this may or may not be true.

But it is anecdotal of the many stories we have heard from small and medium-sized businesses suffering cash-flow problems complaining about the 'out-of-the-blue' calling-in of overdrafts without proper consultation with directors.

And the ultimate costs to the nation are multiplied, as a spokesperson from Wrekin said today, "As a result of this administration, the taxpayer may have to make redundancy payments of £2.5m and there will be the ongoing unemployment costs for more than 500 employees".

 

[Cornish Steve]

During times of economic duress, what about if the company could enter some form of temporary status during which time it can claim from the government the equivalent of unemployment benefit paid to its employees? If it gets through the difficult patch, it could pay the money back; if it folds altogether, the government is no more out of pocket than if the company had folded on day one.

 

[paultnl]

The American Chapter 11 system would be ideal for these situations

 

[Interconnect IT]

Bank debt = handing power over to the banks.

Seriously, I've always said we give far too much power and information to our banking overlords. There's a reason why my mortgage, my personal account, my savings, and my company account are all with separate institutions. I was bitten badly when I was 18 by the Abbey National (homeless for a night, but very nearly for quite a bit longer) as I watched them profit hugely by repossessing my recently deceased grandmother's house that was worth far more than the mortgage. It was an early age to learn such a harsh lesson, but it served me well ever since....

 

[Alison Jones]

I would say the safest thing for businesses is not to have an overdraft facility then there is no risk of the banks taking it away and the business failing. If a company needs it there are other ways to borrow the money which is much safer then risking borrowing an overdraft that could be taken away any time.

Alison

 

[Interconnect IT]

We have an overdraft facility, but I have enough personal money to cover it if needs be.

Our company's biggest problem, technically, is the debt it has to me! About £50k at the moment but we have £30k coming in the next couple of months which should go a fair way to alleviating that

 

[Alison Jones]

The banks don't really help matters though. When we opened new business account in December they were trying to push an overdraft on us, we declined. Then they said we can only have the business account if we accept the business card that is similar to a credit card but they take the whole payment by Direct Debit each month. We accepted but have no intention of using these cards.

Alison

 

[An Oasis]

Bank debt = handing power over to the banks.

Seriously, I've always said we give far too much power and information to our banking overlords. There's a reason why my mortgage, my personal account, my savings, and my company account are all with separate institutions. I was bitten badly when I was 18 by the Abbey National (homeless for a night, but very nearly for quite a bit longer) as I watched them profit hugely by repossessing my recently deceased grandmother's house that was worth far more than the mortgage. It was an early age to learn such a harsh lesson, but it served me well ever since....

Likewise! It is a hard lesson to learn at the time but once you have had the banks suddenly take everything, you view them very differently.


As I said in an earlier post “….their long-tem aims will be firmly fixed upon repaying the loans and becoming private entities once more.” And unless well managed their priorities will be firmly fixed on doing just that. Does anyone on the forum really think that the politicians will be able to MANAGE the banks?

 

[An Oasis]

Or perhaps the brief from Government to the banks is not to bother supporting businesses!

Ministers should let struggling businesses fail, according to Gordon Brown's former strategy chief.



Stephen Carter said it was not the role of Government to ensure that companies hit by the downturn stay alive.



While appearing before a Lords select committee Lord Carter was asked what the Government was doing to ensure that businesses in trouble survive the recession.


He replied: 'I'm not sure that's the role of Government,' adding: 'There are market changes happening that are significant.'

Link

 

[newsvend]

Interesting to see where RBS's lending priorities lie.

I read in the Wall Street Journal that RBS has, since its government bailout, agreed to lend $200 million to a Qatar telecoms company, $50 million to finance a university building in Abu Dhabi, as well as financing a corporate takeover in Australia.

 

[JGOffshore]

Tom Frain must be really upset to see the business he founded go under, but at least he managed to sell most of his shares a couple of years ago when things started going wrong.

Banks just don't seem to have much idea and of course only look at how they are affected. They don't care that the taxpayer will have to pick up the redundancy costs and ongoing social costs. Seems they are happy for the taxpayer to bail the banks out and assume they will do so for the staff.

 

[dingbat]

I wonder if the directors/management of this company made any cost cutting measures to their own wages and perks to keep the company afloat? I doubt it.

 

i know folks who work for wrekin and they found out from the news my mate is halfway through a job for them lucky he insited on staged payments, word on the street is they may owe 20 million so its not quite black and white but the rbs pulling the plug like they did is just stupid how much did we bail them out for?and how many small firms will wrekin take down with them due to the bank doing this ? i know if i was owed £50,000 and the firm went tits up so would i

 

[JGOffshore]

i know folks who work for wrekin and they found out from the news my mate is halfway through a job for them lucky he insited on staged payments, word on the street is they may owe 20 million so its not quite black and white but the rbs pulling the plug like they did is just stupid how much did we bail them out for?and how many small firms will wrekin take down with them due to the bank doing this ? i know if i was owed £50,000 and the firm went tits up so would i

Yes, it is the knock-on effect that seems to get forgotten. It is a little harsh however to blame RBS for their current problems. It may have been Sir Fred who pushed for the takover of ING but it was the board who backed it and the shareholders who voted to go forward with it. That is what caused their problems. Having done that they then run to the taxpayer to bail them out but when a customer runs into trouble they pull the rug from under them. Double standards?

 

double standards indeed, and this wont be the last case of this kind to come up ,people are going to wonder why we bail the banks out if they are not willing to help other businesses in times of need ,or if we start seeing the wholesale removing of overdrafts ext as we did in the last downturn people will be up in arms about this one

 

[UKSBD]

I read somewhere recently that the sub-prime mortgages were only a
small part the current problems, the bigger problem is the fact there has
been to much bad debt created by business failures and the banks were
effectively being too lenient with business.

Most people seem to agree that wreckless lending got us in to this mess
are we now saying they should continue lending to failing businesses in
the hope they can turn things around?

Every case should be judged on it's own merit, as a previous poster said.
the bankers know more about each individual circumstance, than anyone
just reading snippets from the papers or internet.

 

[JGOffshore]

I read somewhere recently that the sub-prime mortgages were only a
small part the current problems, the bigger problem is the fact there has
been to much bad debt created by business failures and the banks were
effectively being too lenient with business.

Most people seem to agree that wreckless lending got us in to this mess
are we now saying they should continue lending to failing businesses in
the hope they can turn things around?

Every case should be judged on it's own merit, as a previous poster said.
the bankers know more about each individual circumstance, than anyone
just reading snippets from the papers or internet.

I genuinely don't believe that bankers know more about individual circumstances. Far from it. In almost 40 years in business I have seen banks fail their customers - customers with viable businesses - all too often.

As it happens I know do Wrekin Construction personally and the fact is that the business was fundamentally sound but has run into cash flow problems.

The legal position is that when a company is unable to pay its debts when they fall due that company is insolvent and the directors should cease trading. However if someone (usually a bank) is prepared to lend money to the company then it is not insolvent and can continue. Wrekin has managed on bank lending for years. Indeed that's how banks make their profits. They finance the cashflow of viable businesses. When things outside the control of a business go wrong then its a bit like trying to turn a super-tanker - it takes time to achieve.

So when a bank, because it has got things wrong in its own business, no longer has cash to lend and calls in overdrafts from customers the whole system falls down. What makes it so galling is that the banks have been given taxpayers money in order that they can continue to fund businesses but clearly they are not doing so.

When you build an economy on bank funded finance - as all developed nations do - and the banks then get into trouble this is the outcome. The UK government has re-capitalised banks in order to avoid this situation because - and they have said as much - it is better to prop up the banks than have to pay the costs of business failure in terms of redundancy and ongoing social security costs.

 

[jim_gold]

UKBSD - I do wonder what publications you are reading!
Let me assure you of one thing, and that is that the world's economic crisis has very little to do with the over-zealous lending by business banking officers.

Certainly a major factor was that banks were not properly assigning risk to certain loans, and the failure by senior management, including bank directors (and, for that matter, governmental leaders in the US, UK and elsewhere) to understand credit risk derivatives and other complex financial instruments.

In the US somewhere like a trillion dollars of mortgage backed securities were outweighed by an absurd 10 times that much in credit default swaps.

For an interesting a priori view on the topic (there are plenty of post-mortem analyses), I suggest a translation of "Der Crash kommt" (the crash comes), published in 2006 by the German economist Max Otte.

But here we are now in a crisis of liquidity. We are seeing roughly double the numbers of administrative receiverships than at the same time last year - currently up to 25 a day. Many of these are connected to the general downturn in sales across many industries.

But the sad thing is that there are a large number of fundamentally sound businesses being forced under because of an inability to service their borrowings. Sometimes this is because their annual sales have taken a hit. But other times, sales are OK, but the interest rate on the loan has been hiked by the bank even in the face of dropping BofE rates. Sometimes the tightening of business lending policies means calling in the overdrafts without proper consultation. These types of business failures were just not happening to anywhere near the same extent over a year ago.

There is no point asking why do these businesses have overdrafts in the first place. Without borrowing most businesses would not be able to grow from micro to mid-market companies.

What I would like to see is a retraining exercise for business banking officers. The government has made more money available to the banks to lend to business but as yet we see no practical evidence of a change in business loan criteria and application procedures by lending officers.

 

[jim_gold]

As it happens I know do Wrekin Construction personally and the fact is that the business was fundamentally sound but has run into cash flow problems.

Like JGOffshore above, our information on this case goes a little deeper than 'snippets from the papers or the internet'.

 

[JGOffshore]

Very good and sound comment from jim_gold.

 

[westend]

I have to agree with Jim_Gold and JGOffshore, I know a few directors of London companies that have had their overdraft limits drastically curtailed with little or no warning - in one case the company has been trading 25 years with no drop-off in sales last year. But because it is a seasonal business, needs help with cash flow at certain times of the year.

 

[business123]

Update on this story:


Apparently in 2007 the company exchanged £11m worth of shares for 'a ruby', had £3.5m worth of tax liabilities and only £2m due in from payments. Also, the company was subject to over 40 CCJ's.

http://news.bbc.co.uk/1/hi/england/shropshire/7946472.stm​

 

[jim_gold]

Yes, the worms are coming out of this one; I have to admit the ruby was news to us. Made for very amusing reading.

Still, the case is anecdotal, I stand by comments previously made about UK banks' business lending policies in general.

 

I had heard about the ccjs but not the ruby if its true about the ruby its the kind of thing you could'nt make up

 

[Techy]

I read what you all say and it's b0ll0x!

There are so many businesses that could continue with financial support, however the government / banks chose not to go down the (alleged) risky path as they have messed up previously.

This is so unfair, as business / personal tax is being used to bail them out over the next 15yrs.

This country is going to be a barren place, to ensure the politicians salaries (+exes) / banks survive.

F00k them all, I'm up for a fight!

 

[business123]

Just another update to this thread, the BBC are reporting that the £11m 'Ruby' could be a £100 'rock'!

http://news.bbc.co.uk/1/hi/business/8284941.stm

 

[Richie N]

It's only worth what someone is willing to pay for it and that's probably not much....

 

[jim_gold]

More twists than a John le Carre novel, surely this'll make an interesting documentary, a film even. At £100, I'll have that 'Gem of Tanzania', sorry coloured rock, for its curiosity value.

 

[Techy]

Heard about this a few months ago but was pissed the other night when I posted

The ruby was actually valued by a proven dodgy dealer and is supposedly only worth a marble and the company owned by Wrekin only introduced it to cover losses

so no shame in supporting banker for them going under

I'm off to get the 'swindon' rock valued that I bought my wife last night, to make my compant worth x 100

 

[spigwell]

I'm off to get the 'swindon' rock valued that I bought my wife last night, to make my compant worth x 100

Not a good investment rocks, wont make your company grow.

I invested all my cash in Northern Rock to see if it made my company 100 x richer, I can honestly say complete waste of my £20.

 

[Noah]

On the subject of banks' questionable handling of customers in debt, be aware that some bank employees' criminal behaviour will jeopardize your business, regardless of the official policies of the bank. Of course, once the bank discovers these crooks, it will sort out the mess and pay full restitution.

I think this sort of scheming needs more publicity; can anyone tell me if it has already been posted as a thread in its own right?

 

[business123]

Well the £11m gem finally got sold, not for £100 but for £8K - still a big difference to the £11m valuation!

http://news.bbc.co.uk/1/hi/england/shropshire/8518242.stm