Fundamentals of Business

The effect of credit on consumers that impact on firms

Firms will not exist without the presence of a consumer, they depend on consumers, so when a consumer is affected by some changes, the same applies to firms. Example of extracts below illustrate.

Example 1
Extract from bbc.co.uk, Monday, 30 June 2008 Credit crunch hits NI motor market First it was the housing market, but now motorists are also feeling the pain of the credit crunch as well as rising fuel prices and hikes in car tax. On Belfast's Boucher Road, no-one wants to hear any talk about recession. Consumer confidence is seen as being low enough without further media comment on the downturn. And yet here in the heart of the city's motor industry, falling sales and redundancies are the reality. It's not just that there are fewer buyers around, tighter credit controls are also hitting sales. A sales director at a major dealership confirmed that growing numbers of potential car buyers are being turned down for finance deals. Just as in the mortgage market, the finance houses are looking to limit their exposure to bad debt and to increase margins. The net result is that fewer people are now completing the process which starts with them walking through the salesroom door and finishes with their signing a credit agreement. The result is that the forecourts are filling up with unsold vehicles.

Example 2
Extract from FT·com Taylor Wimpey plans £660m write-down By Sylvia Pfeifer, June 30 2008 08:16 Taylor Wimpey, Britain's largest house-builder, has confirmed it is in talks with major investors to shore up its balance sheet through an emergency share issue while announcing £660m of planned write-downs of its land holdings. The rescue plan, which also includes a re-negotiation of its banking covenants, is in response to what the house-builder described as a "significant downturn" in the UK housing market. The announcement from Taylor Wimpey came as fresh evidence emerged of the scale of the downturn facing the industry. According to the Bank of England, mortgage approvals, which provide an indication of future demand, fell to a new record low in May. Mortgage lending also fell sharply to £4.1bn from £6.2bn in April and well below consensus forecasts. The troubled house-builder said it had also agreed with its lending banks to relax the terms of its £1.9bn revolving credit facility to focus on operating cash flow rather than pre-tax earnings.

Example 3
Extract from Bloomberg·com Barratt to Cut 1,000 Jobs as Divisions Closed, Merged By Tim Barwell July 3, 2008 (Bloomberg) - Barratt Developments Plc, the U.K.'s worst-performing homebuilder this year, plans to cut about 1,000 jobs as it closes and merges divisions. Barratt will close two divisions and a further eight will be merged into four, company spokesman Dan Bridgett said in a telephone interview today. The reduction may affect 1,000 jobs, about 15 percent of the company's total workforce, a person familiar with the plan said. Bridgett declined to confirm the number of job cuts, or potential savings, when asked by Bloomberg News. Barratt, based in Newcastle Upon Tyne, joins rivals Persimmon Plc and Taylor Wimpey Plc in cutting jobs as U.K. homebuilders grapple with the most widespread housing slump for 30 years. Taylor Wimpey said yesterday it will cut 900 jobs after failing to secure additional financing from investors. Barratt is in talks with banks to refinance part of its £ 1.7 bn ($3.4 billion) in debt to avoid potential breaches of its loan conditions.

Note: A firm must determine onset whether the prices it charges for its goods/services as a proportion of its total sales or volume, exceeds its average individual consumer's income and therefore depend on whether a consumer can secure credit for financing the purchase, and closely monitor the changes in macroeconomic environment.