The effects of the recession on the way businesses are funded are set to continue.

 

The UK economy is out of recession, according to figures from the Office of National Statistics (ONS) released this week, but the economic landscape will never be the same again. Now is the time for businesses to wake up and start planning alternative funding strategies for the future, argues Gerry Bacon, president of the Association of Corporate Treasurers (ACT).

 

“People need to wake up to the fact that the world has changed. Businesses will no longer be able to get most of their funding from banks,” says Bacon.

 

The ONS’ latest figures revealed the economy had grown by a weaker than expected 0.1% in the last three months of 2009, but the good news was tempered by the fact that GDP fell by a record 4.8% for the year.

 

"No doubt some commentators will claim that the figures are under-estimating the true strength of the recovery and will be revised up in time. That is certainly possible, but it won't change the big picture of an economy still operating way below both its pre-recession and trend levels of output”, Jonathan Loynes, an analyst at Capital Economics told journalists this week. 

 

Despite this week’s positive economic data, the long-term effects of the recession will continue to be felt in the banking sector, particularly if Barack Obama’s proposed banking reforms are adopted in the UK market.

 

“People may have grown comfortable that it’s safe to deposit with banks again after all the bank intervention of recent months, but within two to three years this will no longer be the case because the authorities will have to let banks fail”, says Bacon. 

 

“Barack Obama and George Osborne have already stressed that there can’t be any more banks which are too big to fail. They outlined a need to make banks smaller and let some fall over. With this in mind, managing counter party credit is going to be important in future”.

 

Bacon explains that while corporate funding typically follows a 70/30 rule in the US (with 30% of corporate debt coming from the bank market and 70% from the public market), these figures are reversed in Europe, with the majority of corporate debt current coming from banks. Over the coming years, however, this is likely to change, he predicts. 

 

“As banks consolidate more, there will be less banks around and people will need to source funding from different places”.

 

He also suggests that inflation could also be another issue that comes back to haunt businesses over the coming years. “A lot of people haven’t managed in an inflationary environment before, and firms will have to start considering how inflation could affect the business in terms of revenues”.

 

Effective cash and liquidity management will continue to be a key priority for finance professionals and corporate treasurers in the coming years, with an emphasis on the most efficient use of cash.