Wednesday, 8 December 2010

The banks are right – many UK Tour Operators just aren’t worth lending to

Many UK Tour Operators are bemoaning the scarcity of bank lending to businesses but market analysts Plimsoll argue that the banks are right – many UK based operators are just not worth the risk.

High profile failures throughout 2010 have shown the danger of operating on micro profit margins and there could be more to follow. 643 of the UK's 1000 largest operators exist on profit margins of less than 1.5% - 322 of them are making a loss. Any bump in the road will be enough to see them fail because they cannot rely on cheap credit to see them through anymore.

Of course, banks have been guilty of being too harsh in turning away some perfectly healthy companies and it is essential that they play their part in getting business moving again. However, nobody should blame them for refusing credit to operators that might not be able to pay it back. Many are turning up at the bank saying “We spend almost as much as / more than we make”.

The financial sector was correctly vilified for reckless lending that lead to the economic crisis but in the case of many Tour Operators they are right. If banks are to meet government and electorate demands to lend responsibly then companies with consistently low margins just pose too big a risk.

It also seems that debt levels have little to do with the ability to secure funding. Even companies with minimal or no debt are struggling to get credit if they have thin margins. There is simply too much risk attached. We picked 212 companies who have little to no debt but have profit margins that are just too thin.

On the flipside, there is good news for 177 prudent companies that made tough decision early and focused on the bottom line instead of chasing sales over the last few years – they now have the edge in the market. Ironically, these are the companies that the banks are most willing to lend to. One or two of these solid companies should look to capitalise on this advantage and borrow money to invest in their future through a couple of smart acquisitions.

Click here for more information on Plimsoll’s latest assessment of the UK Tour Operators market.

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