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23rd April 2012

Loans to small businesses now the most expensive since 2009

Interest rates for smaller businesses soar but fall for big businesses

Small businesses are now paying the highest interest rate for loans than at any time in the last three years, according to Syscap, one of the UK's leading independent B2B finance providers.

The average rate of interest being paid on loans of under £1 million in February 2012 has now hit 3.92%, up from 3.46% six months earlier and a post credit crunch low of 3.03% at the end of 2009.

Meanwhile the cost of loans to big companies has fallen to 2.66% for loans between £1 and £20 million and just 1.87% for loans of over £20 million.*

Syscap explains that interest rates on loans smaller than a £100, 000 will be even higher. 

Syscap explains that many small businesses that froze investment during the recession are now desperate for funds to replace old or outdated equipment and wish to take advantage of opportunities to expand. However with banks still reluctant to lend to small businesses,  they will have to continue to look for alternative forms of funding to finance their investments such as leasing.

The increases in interest rates for small businesses coincide with attempts by the Government to 'kick start' lending to small businesses, with the National Loan Guarantee Scheme.**

Philip White, Chief Executive of Syscap, comments: "Lending to small businesses has been a focus for the Coalition Government. They will be disappointed that despite all their efforts to reduce the cost of loans to small businesses they have actually increased, putting off SMEs from borrowing. All of this while bigger businesses are still seeing loan rates fall."

"Unfortunately, neither Project Merlin, the Enterprise Finance Guarantee scheme nor Quantitative Easing has had the impact hoped for on small business lending. So, hope now rests on the National Loan Guarantee Scheme. 

"It is not surprising that banks are still reluctant to lend to small businesses, as the pressure on them to build up their capital reserves is immense.  The victims are the small businesses who can't find affordable commercial loans to fund growth and create new jobs."

Syscap says that with the cost of conventional lending rising, businesses should investigate alternative forms of cost effective finance such as leasing in order to fund their investments.

Philip White continues: "For a small business that wants to acquire a long term asset such as IT equipment or machinery, leasing offers an alternative funding mechanism which doesn't have the high interest rates of commercial lending and is tax deductible.  Businesses can often access much more competitively priced borrowing under a lease because of the security the lender keeps over the asset." 

According to Syscap, asset finance, such as leasing, is an important source of funding for SMEs because it allows them to spread the cost of equipment purchases and maintain a healthy cash flow. Unlike commercial loans, most asset finance does not have a negative impact on company balance sheet.

* Data provided by the Bank of England for new loans to private non-financial corporations.

** The National Loan Guarantee Scheme, was launched in March, and is designed to boost bank lending to small business by making it easier and cheaper for banks to raise wholesale credit.  Under the Scheme banks are supposed to pass on their cheaper borrowing costs to small business clients.

See coverage of this press release below:

CityAM