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Businesses paying higher rates for their loans

July 20, 2010

Small companies are paying a higher price for external debt finance but those who do apply are mostly successful, according to the latest Business Opinion survey from ICAEW. The majority are reluctant to take on more debt as they try to manage their costs and are meeting their needs through existing debt facilities.

Business finance study

Some of the key findings from the study include:

  • 58% of those renewing an existing debt facility report an increase in the interest rate compared to their previous arrangement and 58% cite an increase in arrangement fees when re-financing their facility
  • 29% of businesses have experienced some pressures from their main leader in the past 12 months as the lender tried to alter their main debt facility – most commonly attempting to change the terms of the facility
  • Only 16% had a need to apply for new borrowing in the last 12 months
  • 17% of businesses say their organisation has limited its growth plans because of managing external debt facility – this may have implications going forward

There is limited appetite to take on new debt with only 16% of businesses needing to apply for a new external debt facility. This lack of demand is also due to businesses limiting their growth plans and using their existing capital to see manage their costs. Most of the firms however that needed to refinance their debt were successful (68%) but had to pay higher fees for it. Small and medium firms were less successful compared to large firms (7% failure rate v 2%). These firms also experienced more pressure than others from their main lender to try and change the terms of the main debt facility they already have.

Companies are finding other ways to meet their financial needs – through existing debt finance (53%), by reducing working capital (45%) and by cutting costs (43%) being among the most popular.

Clive Lewis, Head of Enterprise at ICAEW, said: “The recession emphasised the importance of sound financial management. This financial discipline means there is not less demand by firms to extend their debt. This is also been influenced by having to pay a higher price for new debt facilities.”

Finance tips for small businesses

  • To help get finance, the accountancy body urges businesses to consider the following:
  • Banks are more risk-averse and demand greater visibility of business performance
  • Banks are seeking an open and honest relationship that can help resolve a business’s problems
  • Work to understand your business’s risk profile and how you might improve it
  • If refused finance, or the terms offered are unacceptable, consider appealing to a higher level in the bank hierarchy
  • Be aware of what other banks might offer
  • Finance is now more expensive in terms of interest margins, arrangement fees and monitoring costs
  • Consider raising more equity finance as an alternative or to supplement debt finance
  • Good financial management should focus on tying up less working capital for any level of business activity