1st June 2012

Goal still wide open for asset finance as cost of borrowing increases

With the UK back in recession, it has been well documented by the national media that the banks remain reluctant to lend to small businesses.

The introduction of the new National Loan Guarantee scheme was supposed to help fill the gap by boosting lending to small businesses and make it easier for banks to buy wholesale credit. Yet banks remain as wary as ever to lend to small businesses; the latest data from the Bank of England shows lending is still in decline.

Now it appears that the cost of lending to small businesses is on the rise too, adding to their woes. Recent data shows that small businesses are now paying the highest interest rates in three years on loans of less than £1 million, typically around 40% more than loans between £1 - 20 million, requested by bigger corporations.

Of course, the reasoning for this is that banks need to mitigate the risk of these small businesses going broke, but many SMEs being charged these high rates are perfectly viable, with established credit histories.

Businesses, rightly or wrongly, are growing frustrated by their high street banks. We found that an increasing number of small businesses are now taking their complaints directly to the Financial Ombudsman Service (FOS). The most common complaint is that they are struggling to renew a loan or overdraft facility with their bank, or are having them withdrawn at very short notice.

But, as they say, every cloud has a silver lining. With banks turning away, small business customers are wising up to the use of alternative financing, which in many ways may be more suitable for businesses than a traditional loan.

For example, if an SME is looking to acquire a long term asset such as I.T or machinery, they are generally much better off using a lease to fund that investment, rather than paying through the nose to borrow from their bank. This is why lease financing has risen 7% in the past year.

With lease financing, the lender has security in the asset, which means they can lend at much more competitive rates of interest. Plus, lease financing can't be withdrawn on a whim like an overdraft, giving SME's a little more peace of mind.

It seems too many banks are not looking long term enough in terms of lending, preferring to shore-up capital for investment in areas they see as more profitable right now rather than investing in the businesses of the future.

While the Government's National Loan Guarantee scheme shows that they have the plight of SME's in mind, getting banks to honour their agreements seems to be proving tricky. In the meantime small businesses can look to alternative sources of finance, such as leasing, which offers far more competitive financing options.

 

Philip White

CEO