Are you sitting on a debt time bomb?

The pressure on IT companies is unlikely to end soon, but the real difficulties will come when the money runs out, writes Eddie Pacey.

Forecasting what will happen in the current suppressed market from a risk perspective, when there is no real indicator that vibrant growth will come this side of Christmas, is not so difficult.

Lower sales, services-oriented models and pressure on margins will continue for many. There are some bright spots in this gloomy picture; some firms took heed and changed things two or three years ago.

Encouragingly, they are now hungry for acquisitions, and the field is wide open with many firms up for sale.

Consolidation will continue at the medium to top end, so long as those selling do not continue grossly over-valuing their businesses and take a sensible view of approaches. Let's face it, buyers can pick and choose who they want. It's their market.

But for most the pressure will continue, and for how long highly geared businesses will survive remains open to question.

A recent article suggested that many businesses created as a direct result of management buy-ins and buy-outs on overstated price-to-earnings ratios could face severe pressure.

Interest rates may be the lowest they've been since the 1950s but it doesn't take a genius to tell you that supporting high debt levels becomes increasingly painful during any prolonged downturn in business activity.

Add to that the other pressures and many firms, regrettably, are sitting on a potentially explosive situation.

Lenders, thankfully, having put in so much, are reluctant to pull the plug. If you lend someone £3m when they are valued at £5m, then see that value drop to £1m, you are going to want to see that money back, and keeping the business afloat seems a sensible option.

What screws up the process, however, is when cash dries up and requests come in for more in order to keep trading.

Banks or suppliers given such a demand will certainly have doubts about offering more money, credit or time to pay. So, if the economic slowdown continues, we will undoubtedly see more casualties.

Throw in questions about security validity following the Privy Council's Brumark case ruling or the Basel II banking agreement, and you can see that banks will be looking closely at financial stability before opening the vaults.

Thankfully, trade suppliers continue to give credit, but the pressure is on. It is easy to drop a credit line when business volumes are low, but much tougher to give it back if the numbers do not stack up.

Eddie Pacey is director of credit at Bell Microproducts Europe.