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SMEs to see rise in credit costs

By Holly Jones | July 22, 2011

The cost of borrowing money is expected to rise in the next three months
The cost of borrowing money is expected to rise in the next three months
The Bank of England has found that small companies are still likely to see increased credit costs and variations in the credit available to them.

Although the cost of borrowing had remained stable up until May 2011, it is expected to rise in the next quarter, according to the Bank of England’s Trends in Lending report.

According to their research, larger firms are now able to acquire bank lending if it is required. However, smaller businesses are still seeing ‘more variable’ rates of credit availability.

Larger and medium-sized businesses are also enjoying cheaper credit, fees and commissions, and can expect to see the cost of their debt decrease over the coming quarter.

However, the demand for credit has decreased recently, the Bank of England said, due in part to a lack of mergers and acquisitions. The study also suggested that some of the UK lenders had seen SMEs concentrating on paying back old debt, rather than applying for new loans.

However, another study by the Bank of England, the Credit Conditions survey published at the end of June 2011, found that there was still strong demand from SMEs for credit, but they were facing restricted credit availability and increased costs of borrowing.

The net volume of lending decreased to £4 billion in the three months to May 2011, and lending to businesses with a turnover of below £1 million had decreased by seven percent from the same period last year.

John Walker, national chairman of the Federation of Small Businesses, said: “Once again the smallest of businesses are losing out. It is very bad news that the volume of lending to small firms fell – despite evidence that there was a marked increase in demand for finance from the smallest of businesses.”

“It is the UK’s 4.8 million small firms – the country’s job creators – that will help pull the recovery onto firmer ground, yet they are being given a worse deal than larger businesses,” he added.

“Until there is more competition in the banking sector, this practice will continue and that no amount of lending targets will improve the situation.”

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