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25 August 2009 Rescue finance could drive up borrowing costs for SMEs as a whole. Government proposals would undermine creditors security over assets. New proposals by the Government to improve access to rescue finance for distressed businesses could drive up the cost of lending to SMEs as a whole, warns Syscap one of the UK’s leading independent financing providers. Under proposals put forward by the Insolvency Service the rights of existing creditors to security over borrowers’ assets could be overridden to make it easy for distressed companies to obtain rescue finance from other lenders. According to the consultation paper, companies in administration often find it difficult to raise finance when they cannot use their assets as security because existing loans are already secured against them. The consultation proposes that the security of existing loans over assets could be overridden to make the provision of finance to insolvent companies more attractive to new lenders. According to Syscap, the risk of allowing the rights of existing creditors to be overridden is that they will raise the cost of lending to SMEs to offset that risk. Philip White, Chief Executive of Syscap, comments: “This proposal says that a lender’s security over assets could end when the company gets into trouble. That is exactly when a lender needs to have security over the assets they have lent against!” “While making it easier for financially distressed businesses to continue to trade by improving access to rescue finance is a laudable aim, there is a real risk by adopting these changes that the cost of borrowing to the SME sector as a whole will increase as a result.” “If lenders raise costs the net impact of these changes could be that access to finance is even harder to come by than it is already, potentially increasing the likelihood that SMEs will face further cashflow problems in the future.”“Confidence is vital to lenders’ willingness to lend. These proposals could create more issues for the embattled SME sector than it resolves at a time when credit channels are still severely blocked.” “Existing lenders will be concerned that their security will be diluted in the event that a borrower goes into administration. This may persuade them to demand more security when they lend, particularly to higher risk start-ups, which could limit the amount these companies can borrow and inhibit their expansion.” The consultation on the proposals in “Encouraging Company Rescue” ends on September 7. See coverage of this press release below: ThisIsMoney.co.uk |
