That was the unanimous view of financial services professionals and SME commentators who see last week’s unprecedented 1.5 per cent base rate cut as signalling a deep and extended recession, coming less than a month after the Treasury’s £500 billion bail-out of the beleaguered banking sector.
Henry Ejdelbaum, managing director of ASC Finance for Business, a financial consultancy to small businesses, said: “SMEs are going to continue to struggle to access finance despite the interest rate cuts, since bad debts have placed banks under enormous pressure to increase the quality of their loan books.
“Banks are now saying that if a firm belongs to certain industrial sectors then they are going to ask for a certain percentage above the base rates. Banks believe that if they lend to safer industries or at higher rates then they are less exposed to risk of defaults and bankruptcies.”
Mr Ejdelbaum said banks were also scaling back their lending flexibility. “We recently helped a client whose interest on his overdraft increased to 12 per cent from 7 per cent without notice,” he said. “We also had to look for alternative funding for an SME whose £100,000 overdraft facility was suddenly cut back to £50,000.”
Lucy Findlay, head of the Confederation of British Industry’s Enterprise Group, agreed that credit conditions for SMEs was hardening. “Several months ago one of our members informed us that their business needed to increase borrowing against their payroll. This request was turned down even though this facility had been available in the past.”
She added: “SMEs who borrowed against the base rates will find that the interest rate cuts will feed though. But those who are looking for new finance facilities will find access to business finance will tighten and cost more.”
Ms Findlay said the expectation was that those who borrowed against Libor rates are not going to see any reductions, even though these rates were also reduced. “We believe they will need to come down further before this happens,” she said.
“It’s also going to take time for the Government bail-out packages to pass down into the SME community. The risk reward ratio will need to be recalibrated by the banks and the money will have to be released first.”
A British Bankers Association spokesman said its members were committed to passing on the rate cuts and to making credit available to SMEs in adequate quantities.
He said: “Banks are committed to helping SMEs. As part of the Government bailout banks agreed to continue lending to SMEs at 2007 levels. Banks have no reason for not sticking to their pledge.
'Nobody makes any money out of a failing business so it makes sense for banks to support businesses. Our key message is that if you are an SME and you are entering a period of financial difficulty, then you should speak to your bank sooner rather than later.”