Cost of business loans on the increase

The availability of finance for small firms has improved over the past two months, but that has been paralleled by an increase in the cost of credit, a new report has revealed.

The survey, which was carried out by the EEF, the manufacturers’ group, is the first on bank lending to businesses since the Project Merlin announcement last month.

Having seen a moderate fall in the proportion of companies reporting an increase in the cost of credit towards the end of last year, conditions, the EEF said, have gone into reverse over the past two months.

Although the balance of firms reporting easier access to credit was slightly up in the first quarter of the year, the gains were more than offset by the 32 per cent that said that the cost of credit was on the up compared with the 19 per cent that made the same complaint in the final three months of 2010.

The focus of the extra expense seems to be falling largely on smaller firms. The proportion of small companies seeing an increase in fees on existing borrowing increased to 32 per cent from 17 per cent in the previous quarter, with none reporting a decrease. By contrast, only 6 per cent of large companies reported a rise in the past two months and a similar proportion of large companies actually saw a decrease.

Lee Hopley, the EEF’s chief economist, said:?”The improvement we saw in lending towards the end of last year seems to have been short-lived. While there appears to have been some easing in availability, for many smaller companies the question is still ‘at what cost and under what terms and conditions?’.

“It is far from clear that, for small manufacturers in particular, we are on the path to easier access to more affordable finance. As a result there appears to remain a gap between the aspirations of Project Merlin and the reality on the ground.

“Until we start to see measurable progress on both cost and availability of credit, access to finance will remain the weak link in the Government’s strategy for growth. This will require addressing the underlying issues of increasing competition in the banking sector and improving its understanding and relationship with industry.”