Banks to raise margins on small business lending

MARGINS on small business lending should rise at least 0.5 percentage points over the next 18 months, the British Bankers Association said yesterday, writes Peter Rodgers.

David Laverack, head of small business services at Barclays Bank and a member of the BBA small firms committee, said there had to be an increase because of the unprofitability of this type of lending.

On top of the high cost of monitoring small firms and providing money transmission services, bad debts cost the banks pounds 4m a day last year.

He said banks needed to ensure that the interest rates they charged small businesses covered their own outgoings over the course of a business cycle, including the downturn, during which bad debts rose sharply.

A Bank of England study this year found a 0.5 per cent rise in average margins over 18 months, to 3.5 per cent over base lending rate, and 'we have to see a similar increase at least over the next 18 months,' Mr Laverack said. He made clear that averages were misleading and many firms would have to pay more than the suggested increase.

He also said Barclays was not actively marketing the Government's improved small business loan guarantee scheme, which starts on 1 July. It was designed as a last resort for businesses that could not raise money in other ways.