Sudden jump in cost of bank loans for businesses as banks fear Brexit risks
The average interest rate on new bank loans for businesses has suddenly jumped from 2.56% to 3.05% in the last month as banks turn increasingly cautious on Brexit risks, says Growthdeck, the private equity investment firm.
Rates on new business loans are now at their highest level in more than a decade. Average rates fell below 3% in February 2009, in the middle of the last recession, and have not risen above that level until the last month.
Growthdeck says that banks have become increasingly cautious on business lending in recent months as the threat of a no-deal Brexit has risen. As well as raising their interest rates on new loans, banks are also choosing to lend more to bigger businesses that they see as less risky, rather than to smaller businesses.
Growthdeck explains that the value of bank loans made to big businesses has jumped by £44.8bn (16%) since the Brexit vote in June 2016, but the amount loaned to SMEs has now fallen by £1.1bn (1%) over the same period.
Brexit is seen by banks as a major risk factor when it comes to loaning to SMEs. There are fears that a disorderly departure from the EU may trigger a sharp increase in financial difficulties for small businesses, leading banks to cut their lending to SMEs.
Gary Robins, head of business development at Growthdeck, says: “Banks have clearly been reducing their lending to small businesses.”
“Small businesses are finding it harder to borrow to grow, and where that funding is available, it’s more expensive.”
“That’s hitting small businesses twice over – it’s become much more difficult to find loans from high street banks, and where it is possible, rates are rising.”
“SMEs are vital to the UK economy but banks are starting to treat them the same way that they did in the last credit crunch.”
Growthdeck says that SME directors should be aware of alternative funding options available to them. The government’s Enterprise Investment Scheme (EIS) enables unlisted growth businesses to secure equity investments of up to £5m per year, while investors are granted tax reliefs as an incentive.
Gary Robins adds: “With bank lending in increasingly short supply for many start-ups and early stage businesses, the EIS and SEIS schemes are vital in encouraging investment to ensure that British SMEs can implement their growth plans.”