Why are rates falling for large firms, but rising for SMEs?

Interest rates on new bank loans under £1m rose from an average of 3.76 per cent in Q2 to 3.85 per cent in Q3 (three months to September 30). 

This suggests that Funding for Lending, which was launched amid much fanfare by the Government in August, has not had much impact on the cost of borrowing for small businesses.

In contract, average interest rates on loans over £20m for large businesses did fall, from 2.48 per cent to 2.34 per cent over the same period.

Why is the Funding for Lending scheme failing those most in need of improved access to finance, Britain’s small and medium-sized businesses?

“Lending to SMEs by banks is more capital intensive than lending to larger businesses,” says Philip White, chief executive of finance provider Syscap. “It’s not hard to see why banks might prioritise lending to these big businesses.”

Failed initiatives

Although the Coalition government has spent two years attempting to stimulate bank lending, no scheme has managed to have a substantial impact on lending to SMEs.

There are many examples of failed initiatives: the Enterprise Finance Guarantee Scheme, the National Loan Guarantee Scheme and many others have all tried and failed to make finance more widely available to SMEs at affordable rates.

Three months after the Funding for Lending launch, the Government must now take steps to ensure the scheme does not also turn into a missed opportunity.

How would you suggest the Government address the issue of rising interest rates for SMEs? Leave your comments below.

Additionally, if you are thinking of raising more funding for your own business, make sure you sign up to attend Real Business Funding, a one-day FREE workshop to help you raise finance.

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