Credit Crunch Looming: What it means to your Business

By now, most would have read about how Singapore's top three banks are facing millions of dollars in impairment losses due to bad debts (write-off of uncollectible loans) from the struggling oil and gas industry. Businesses in other unaffected industries may feel that they are spared or not affected but ….. that is just a false sense of security(read this!).

Think in the shoes of the banks poised to report losses or lowered earnings, what is the next logical step to take?

To “cover their losses” they will have to search for alternative avenues of income and step up repayments from "unaffected" businesses.

A chain reaction will occur, with the banks placing more effort in reviewing credit terms (i.e. higher interest rates, smaller loan amounts/periods, bigger repayment amounts etc.) for new borrowers.

Gone are the days where cheap and abundant credit is being handed out to businesses looking for their first bank loan. And current borrowers will not be spared the scrutiny too, as missed payments may be slapped with higher penalty rates, or worse, a less than ideal repayment term where a demand for full repayment may be issued!

What does it mean for your business?

With the availability of "cheap" loans gone, business owners looking to build their enterprises will feel they are compelled to adopt unpleasant measures, i.e. cost cuts, usually scaling back on marketing or business development expenses, or wage cuts to weather through the crisis.

Though these measures will help elevate the financial situation, it is only a temporary measure and the long term effect may have drastic consequences such as leading to a loss in market share (market presence not being enforced via advertising/marketing) or a drop in revenue from current customers (sales teams not being able to promote new products to existing customers).

Staff morale will take a serious beating when salaries are reduced, even though the much oft said "better to have a job than none" phrase is being used to justify the move.

And you are not alone! Your customers are also subjected to the same conditions and may possibly prolong repayment of their outstanding amounts, meaning your enterprise would not be able to collect on past due invoices (no cash inflow to you!).

However, all is not doom and gloom. Cash rich businesses would be well positioned to take advantage of the situation and can choose this time now to seek mergers with struggling competitors. This is where the Chinese term 危机 explains it well – Tackling opportunities in times’ of adversity!

Ways to reduce the impact of a credit crunch

Looking at the dire business environment now, the smart business owner should start to examine their Profit and Loss statements and set out to determine if cashflows are still in the black. Projections are to be prepared, with realistic conditions set. This forward planning measure will keep you updated on any potential difficulties ahead.

The Balance Sheet would have to be looked at as well, with an emphasis on reviewing Accounts Receivables ("AR") and Accounts Payables ("AP"). Ideally, AR should be greater than AP (AR > AP), but do not be too happy if your AR consists of "old" unpaid invoices (unless your credit terms state differently, 6 months is too old). The “old” AR usually has a high likelihood of being uncollectible and may have to be written off as bad debts.

If there are outstanding bank loans, look at your past repayment activity. If payments were paid on time, banks would class your business with a "Safe" credit rating, and now would be an optimal time to check with your banker if you could pay down part of the outstanding principal amount, and perhaps renegotiate on the interest rates and repayment terms. This effectively translates to interest payment savings in the long run! Remember, being proactive goes a long way in building longstanding relationships with the banks.

Last but not least, do not focus too much on reducing expenses and/or investment in your business. If the expenses and/or investments are justified in generating more income for the business, spend it!

Surviving the Crunch

The above steps would help to provide some financial stability to your business in the long run, and perhaps even assist in it surviving the crunch. If your enterprise survives, it would come out of the crunch as an efficient and resilient business.

Coupled with the fact that you were proactive in negotiating with the banks on outstanding loans, the banking relationship strengthens and when times have improved, your enterprise would be a prime candidate for preferential treatment by your bankers.

Remember - the bad times don’t last forever- if anything, this would be a good time to relook and streamline your company processes.

We hope the above will assist in your enterprise's survival in the long run, and if we can help you to better manage the process or advise on the methods, feel free to contact us for non-obligatory chat on your enterprise's financial health!

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