Red and blue arrowsUK SMEs would want the Bank of England to follow the US’ example of providing longer term stability on interest rates says independent finance provider Syscap.

The US Federal Reserve announced on August 9th that it would freeze short-term interest rates for two years as a measure to improve business and consumer confidence.

Philip White, CEO of Syscap, said: “A lot of UK SMEs would be far more willing to invest in business assets and their staff if they knew that the base rate was going to be capped for the next two years.”

“Businesses can fix their borrowing costs with their lender but obviously the lender has to charge them a premium for that.”

“If the Bank of England were to commit to keeping rates fixed for a set period it would act as a real shot in the arm for the UK economy.”

“All the periodical speculation that you get about rising interest rates can be incredibly unsettling for borrowers.”

Syscap explains that a lot of measures used by the Federal Reserve to try and foster an economic recovery in the US have subsequently been adopted by the Bank of England.

Syscap says that whilst commercial borrowing rates are not solely determined by the Bank of England base rate (more often it is linked to LIBOR) a commitment to steady base rates would be a very powerful message and should help keep rates across the market down.

Adds Philip White: “In actual fact in the current climate, leasing provides an ideal mechanism or facility to fix the cost of your investment, providing predictability and a hedge against future rate increases.”

 

Small business owners are losing out on deposit interest rates for fear of jeopardising relationships with their existing bank, according to new research from Investec Private Bank.

80,000 small and medium sized UK businesses (35 per cent) say they are reluctant to move their company’s cash deposits to another bank as they do not want to risk their ability to borrow or to lose existing preferential rates they receive on other products from their existing bank.

This is despite more than half (53 per cent) of them saying that they realise they could be earning a higher rate of interest for their business deposits with another bank or building society.

Investec says the research indicates that smaller businesses could be the big losers in the recession as some banks have either reduced lending or have raised the rate of interest on loans at the same time as failing to pay competitive rates of interest on savings deposits. This is particularly worrying as over 500,000 SME owners (37 per cent) do not know the interest rate they are currently paying on bank loans and overdrafts and 65 per cent of owners (over 800,000 companies with a business savings account do not know the returns they are receiving on these deposits.

Almost a third (32 per cent) of SME owners (125,000 companies) who know the rate of interest they are paying on business loans have seen the rate of interest charged on these bank loans increase over the last 12 months. This is despite the Bank of England reducing the bate rate from three per cent in November 2008 to 0.5 per cent now. Of these, more than one in 10 owners said that their bank had increased the rate on their company loan by more than one per cent in the past 12 months.

Jack Jones of Investec Private Bank said: “Smaller businesses are being squeezed at both ends by banks at a time when they are most needed. On the one hand they are struggling to borrow additional monies at affordable rates; while on the other, they are receiving often derisory rates of return on any savings. Our research shows that many owners of smaller businesses are worried that they will be penalised if they move their savings to more competitive accounts.

“Businesses should also be able to move their deposits to accounts that pay a consistently competitive rate of return without jeopardising rates and terms they receive on other products such as loans and mortgages.”

Reasons that smaller business owners have not moved their savings to a bank / building society paying a higher rate of interest

  • Not worth the administrative headache
  • Have not yet considered moving, but may do so
  • Do not want to jeopardise ability to borrow or increase borrowings
  • Do not want jeopardise preferential rate paid on existing loans
  • Loyalty to existing bank
  • Have a good relationship with existing bank
  • Do not want to adversely affect rate on existing business overdraft
  • Tied in to a fixed rate for a set period
  • Do not want to adversely affect rate on existing company mortgage
  • Other
  • Don’t know

Source: Continental Research

Banks continue to squeeze small businesses by charging ever-increasing interest rates on loans and overdrafts – despite the Bank of England dropping interest rates to 0.5 per cent – says the Federation of Small Businesses (FSB).

More than 100 small firms have already responded to the FSB as part of its Bank Watch monitoring system of bank branches. The majority of respondents said that their interest rates had been kept at between five and 10 per cent above base.

Some reported that the banks were doubling interest rates on overdrafts and loans, rising to around 20 per cent. 
Speaking at the FSB’s annual conference in Newport, FSB Policy Chairman John Walker said that as members of the organisation were still having trouble getting access to finance, the FSB had launched a new set of banking principles of good practice which high street banks were encouraged to sign up to.

The Seven Principles of Small Business Banking act as a foundation for mending the broken relationship between small businesses and their banks and restoring lending to viable small firms.

The principles include agreeing to fix costs on loans and overdrafts for the whole of 2009 if repayments and limits are not broken.

John Walker, FSB policy chairman, said: “Things are tough for small businesses at the moment and they really don’t need banks charging over the odds interest rates on their loans and overdrafts – especially as the Bank of England’s base rates have been getting lower and lower in an attempt to stimulate the economy and bank lending.

“The FSB’s seven Principles of Small Business Banking are an important step towards mending the difficult relationship between small businesses and their banks so they can pull together to get the UK out of recession as quickly as possible.”

ox_inside_LargeLloyds TSB pledged today to pass on, in full, any base rate cut announced this week, to all its small business customers with variable rate loans and overdrafts.

The pledge forms part of Lloyds TSB’s commitment to support small businesses through the downturn. It is one of six measures set out in the bank’s small business Charter, launched in December 2008.

John Maltby, managing director, Commercial, Lloyds TSB, says: “These are undeniably difficult times for small businesses and we want to do all we can to help offer them the support they need. Our pledge to pass on base rate cuts is just one of the promises we have made, to give small firms the best possible chance of steering a smooth course through these tough economic conditions.

“As well as the range of pledges in our Charter, we have also made clear our commitment to offering funding to small firms through the range of recently announced government initiatives. We are, for example, one of the most active lenders under the Enterprise Finance Guarantee.

The full list of pledges in Lloyds TSB’s Charter is:

  • Future reductions in base rate in 2008 and 2009 will be passed on in full to Lloyds TSB Commercial’s customers
  • Lloyds TSB will not change the price or availability of overdrafts during the period of a customer’s agreement (typically 12 months) as long as their accounts are maintained within agreed terms and limits
  • Lloyds TSB will agree to any reasonable request for short term finance and do what we can to support any viable business through temporary difficulties.
  • On renewal of an overdraft facility, Lloyds TSB will only change the limit or the price if the risks associated with that customer have changed materially
  • Small business borrowing will not be switched from base rate to LIBOR
  • Lloyds TSB will host a series of 120 business advice seminars across the UK to provide expert guidance and support for small firms and to strengthen local networks of business professionals.