The credit crisis

This essay will discuss the impact of financial market conditions on the business sector. Firstly, the essay is going to analyse what is the impact the expansion of financial markets and credit activities by banks had on financing the small, medium and large enterprises from the retail sector in the UK. Secondly, it is going to examine how the current crisis has influent the financial operations of these firms. Lastly, it will compare the small, medium and large companies’ participation in the use of the financial products and services made available in the entire period.

The world financial crisis started in the middle of 2007. The global stock market have plunged, while many large financial institutions have suddenly fallen down or been taken over. According to George Soros’s “Economy Recovery Plan” (2009), the main cause of the financial bloom is the impact of sub-prime crisis (as the interest rates rose and house prices fell), which firstly occurred in the USA then spread out to the rest of the world. Sub-prime mortgage loans has infected and seriously destroyed the balance sheets of many of the world’s leading banks.

As a result, financial institutions became unwilling and unable to lend each other. This liquidity shortage exposed underlying structural weaknesses within the banking system, including over reliance by some banks on wholesale funding rather than savers’ deposits, to fund their business and the inadequate capitalisation of many banks. In January 2009, the UK government declared the Britain is in recession experiencing from global finance breakdown followed by other countries such as France, Germany, Japan and China.

The effects of the recession usually is felt by the retail sector first, when the consumers withhold or reduce their spending. When the retail sector suffers, it has a knock-on effect on other industry sectors too. We are witnessing a decline in the housing market, trouble in the banking sector, bad news from the high street retail sector, hospitality and other industry sectors. This has also caused major concern in the investment markets (Cityzone, 2008).

Thus, the crisis has huge impact to many enterprises in the UK including small, medium, and large, causing them lack of liquidity and higher debts as well pushing them to cut back the expenses, services and lay off of the employees. According to the Department for Business Enterprise & Regulatory Reform (BERR, 2008) there were an estimated 4. 7 million businesses in the UK at the start of 2007 whereas Wholesale, Retail and Repairs sector was the biggest employer for the same period with 562,000 enterprises that had a combined employment of 4,881,000 and represent 21% of all UK private sector employment.

The vast majority of these (99. 3%) were small businesses and they provided 47. 5 % of the UK private sector employment and 37. 4% turnover. Large businesses are in minority; there are only around 6,000 firms but they account for 40. 8% of private sector employment and 48. 5% of the turnover (See Figure 1). Figure 1: Share of enterprises, employment and turnover by size of enterprise UK private sector, start of 2007 There is no single definition, but the Enterprise Directorate defines businesses according to the number of employees they have.

Small businesses are those with 0-49 employees, medium-sized businesses have 50-249 employees and large businesses 250+ employees (ibid). A company qualifies as a small or medium-sized company if it meets two out of three criteria relating to turnover, balance sheet total and number of employees as set out below in its first financial year, or in the case of a subsequent year, in that year and the preceding year (See Figure 2). There are other definitions, for example, that of The Company Act 1985 or the European definition of an SME (BERR, 2008).