In Business Credit Crunch

The striking fashion and ideas magazine Tank has an eye-catching picture of a not–very–clothed Claudia Schiffer (.pdf) on its latest cover. Inside, less glamorously, there's a tired and battered picture of your correspondent, with clothes on.

The title of the accompanying interview by the Tank founder and editor Masoud Golsorkhi is "Day of Reckoning" (.pdf); in the introduction he says that I am "to business journalism what Robert Fisk is to reporting on the Middle East," which is very flattering and slightly over the top.

But sometimes I do manage to get out into the harsh real world and this has been one of those weeks: we decided to find out what's happening to business here and now in the aftermath of the Credit Crunch when some of the economic commentators allege they can see signs of the green shoots of recovery.

That is not what we found for this programme. Indeed there are sober and experienced people who think things will get worse before they get better or – if not worse – then recovery is going to remain a distant hope for some time.

In particular the programme focuses on two things that outsiders hardly think about when the going is good: cash and credit ... particularly the trade credit that nearly every supplier extends to his or her buyer as part of the automatic terms of trade.

A transaction is completed on trust: the invoice is sent out to be paid after a delay of 60 days or something. That's how trade works. But not at the moment.

About a fifth of the transactions in Britain are normally subject to credit trade insurance: a specialist insurer takes a fee for guarantee that the money will be paid over even if the customer defaults. To enable this to happen, the insurance firms check out their clients' customers, vetting the business from the accounts filed at Companies House.

At least that's what used to happen. But so deep and severe has been this recession that the credit insurance companies have switched to asking suppliers for monthly financial reports, so quickly has the business outlook deteriorated.

And credit insurers are withdrawing coverage from companies they are uncertain about: because they're in troubled industries, or reports surface that the business is not paying its bills on time.

You can see how this gums up the works: a denial of cover from the insurer may well pitch a company into deeper difficulties than it was in beforehand ... a self–fulfilling prophecy.

The British Government attempted to ease the situation by making £5 billion available to insure companies where credit insurance had been reduced but not denied, a so–called 'top up' scheme.

Hardly any of the money has been taken up, but companies are still struggling to keep going, resorting to expensive guarantees to their suppliers which tie up working capital and reduce profitability at a time when there are not many profits to be made in the first place.

Even so, four-fifths of the trade transactions in Britain are not reliant on credit insurance. In this case, businesses are often taking a bet that their creditors will pay up, crossing their fingers and hoping it is business as normal.

That puts the spotlight on the other concern of this programme: working capital. Which brings in the banks.

Shaken by the dodgy lending binge that led to the Credit Crunch, banks are trying to rebuild their own capital bases by cutting back on lending and doling things such as turning flexible overdrafts into proper loans with conditions attached.

Banks ruined their reputations in the financial markets casino, and then asked for bailouts because of their fundamental social purpose: they were 'Too Big to Fail' because so much of the rest of the economy depended on their enterprise lending.

But as they struggle to survive, the banks can no longer carry out a lot of what used to be seen as their social and economic purposes.

To their business customers, many banks have taken away the umbrella they extended so readily a few years ago now that it's raining. A cliché yes, but a vividly apt one, or so the business people in this programme tell me.

And there is real outrage that many of the banks who are doing this have been bailed out with huge sums from the taxpayer that may cripple the health of the economy for years to come.

Cash and credit fuel the business economy. It will be some time before they are back to something like normal ... whatever stock market investors seem to think.

Peter Day

Useful Links from BBC News

Recession Tracker: Track rises in unemployment in your region

Recession aftershock: One year on - a look at the impact of the global recession in pictures, video and graphics

Global recession: Timeline of events that led to stockmarket crash

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Small Wonder - microfinance.

Unlimited Company - organizational models.

Credit Crunch - cash and credit.

Student Startups - student entrepreneurs.

Media Mayhem - changes in the newspaper industry.

Squeaky Clean - branding.

Battery Power - Bolivia.

Women's Work - women in the city.

Hell For Leather - John Timpson and Timpson's Shoes.

Learning Curve - organisational culture.

Let's Start a Bank - banking.

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For more programmes visit the In Business programme archive.

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