Banks urged to pass on interest rate cut to small businesses

The Forum of Private Business (FPB) is welcoming the Bank of Englandís decision to slash interest rates to 2% – the lowest level since 1951 – but warning that struggling small businesses will only benefit if the banks follow suit.

The Bankís Monetary Policy Committeeís (MPCís) 1% reduction in the base rate follows its 1.5% cut in November 2008. However, although it is gradually coming down, the interbank lending rate (LIBOR) remains just under 1% above the base rate. ëRealí interest rates, those being offered by banks to their customers, are often significantly higher. The FPB is urging the UKís major lenders to heed the Bank of England and pass on the cut.

This further cut in the rate of interest is pleasing. I certainly hope that it will be very quickly reflected in both market rates and in the cost of borrowing being offered by banks to small businesses, said the FPBís banking adviser, David Cavell.

Although all of the banks benefitting from the Governmentís 37 billion bail-out scheme have now pledged to maintain the availability of loans and overdrafts for small firms, there is still evidence that credit restrictions are being imposed by lenders, including those set to receive funds from the European Investment Bank (EIB).

The FPB is concerned that banks are increasingly likely to bracket all small businesses – or those operating in specific industry sectors – as ëhigh riskí, regardless of the often profitable historical relationships they have enjoyed with them.

Every two weeks the FPB is surveying members on its new economic downturn panel in order to gauge lending levels being provided by the banks. One panel member, Kevin Whiting of Sherdon Estate Agents near Basingstoke, Hampshire, has banked with HSBC for 17 years, but recently had an application to increase his small business mortgage – and bring in an additional 600 per month – rejected. However, he found he could not switch banks because of the steep interest rates being offered elsewhere.

In addition to increasing the value of our property, the extra income stream that would be generated would really help us in this climate. Itís preventing me from growing my business. My mobility is also restricted now – Iíve looked elsewhere, but the percentage rate above LIBOR is too high with other banks, by as much as 3.5% or 4%, said Mr Whiting.

My bank said it had decided to withdraw from the property development sector due to the current market conditions. My argument is that, if this is true, it amounts to a moratorium across the board, and means that theyíre not considering individual cases.