I've lost count of the amount of "final settlements" we have seen of the Euro crisis. Already, the latest one is unravelling, as Spanish bond yields push to unsustainable levels & unemployment in the Eurozone reaches an all-time high. Almost everyone I speak to in fund management or banking thinks some sort of collapse or seismic change of the Eurozone is likely. Only one thing is certain: no-one really knows where this will all end up.
As the owner of an online invoice finance business focusing on small & medium sized business, I've already had business owners - both importers & exporters - coming to me telling of fears with southern European suppliers, with a credit crunch hitting Greek, Spanish and Italian firms. These companies are already seeing a huge impact on their profitability and cash flow.
So what does this mean for your business, and what, if anything can be done to prepare for the unknown? There are a few steps you can take to safeguard your business and keep ahead. It makes more sense to try to work out your exposure now, not when the storm hits.
Even if your direct customers are not based in the Eurozone, if your key suppliers are based abroad, there are several knock-on effects to look out for. With supply chains now global, it's all too easy to think you are absolutely fine, only to discover that one crucial part of your product line requires, say, a circuit board that is manufactured in Italy, or insoles sourced from your wholesale shoe manufacturer based in Spain.
Of course, this might not mean the outright collapse of a supplier - but at a minimum, anyone importing or exporting should expect delays in payment from any client with any kind of exposure to the Eurozone. This has a impact on your own cash flow. If factories in Spain can't get loans from local banks, they'll ask you to pay larger deposits upfront, which means that you might be forced into bridging the funding gap until you get paid by your own customer (e.g. your large high street retailer who takes 60 days to pay you).
It's very important to work out your cash flow requirements and put contingencies in place - not if things carry on if they are, but just in case things get horribly, shockingly worse. In 2009, the car industry saw sales drop by 50%; the Japanese tsunami of 2011 led to major disruptions in global supply chains as specific parts became impossible to source. Do you think your business could survive the equivalent financial hit from Eurozone debt meltdown? If you have a plan in place, it makes this sort of thing much easier to survive.
It's still hard to predict the precise impact of the Euro crisis on banking and the real economy; but looking at the Lehman bankruptcy as a model, we would expect to see a freezing up of inter-bank lending as sovereign lending goes sour and banks have to take write-downs on their balance sheets.
You should be ready for banks to scale back quickly and stop supporting you - in 2008, when Lehman went under - almost all high street banks slammed the brakes on lending. Even now, after initiatives like Project Merlin, credit easing & the Chancellor's latest £100 million injection of cash into the banking system, loan rates have not returned to pre-crisis levels. To be prudent I would look into other ways to finance your business outside of the existing banking system, increasing your options in case your main provider decides to retrench.
Perhaps the biggest impact would be on trade both with the Eurozone and within the UK. Any escalation of the Eurocrisis would be sure to push the rest of Europe back into recession for 4-5 years at least. Even in Northern Europe, which would be least likely to be severely impacted, UK exporters would be hit by the weakening of the Euro as a currency.
British products would become more expensive to European buyers. Considering that over 50% of UK exports are purchased by European customers, maybe it's time to start thinking about shipping more to Brazil, India or China?
In short, regardless of your feelings about the EU, any sort of collapse in the Eurozone would be a disaster for UK businesses. Of course, those who are well prepared for a shock like this are most likely to survive and prosper in the aftermath. Let's all hope the politicians get their act together and solve this definitively.