Bank charges and lending restrictions could get worse for small businesses

A business pressure group has expressed concern over reports that high street banks are beginning to reduce credit availability and increase overdraft charges for small companies, at a time when they are in most need of funding.

The Forum of Private business (FPB) has warned that, following the Lloyds TSB and HBOS merger, small companies will have even less choice of banking services as the credit crunch continues.

This warning echoes our own views at Bytestart. Earlier in the month, we pointed out that: "The proposed merger may be needed to allay a potential crisis, but the concentration of banks into fewer hands is bad news for business. It means an even more limited choice, and the lack of banking competition will inevitably mean businesses get a poorer deal."

Interestingly, the British Bankers Association (BBA) recently released figures which suggested that small businesses were borrowing as usual during the first half of the year, although the figures did not show if small companies were doing so at higher levels of interest.

Recent research carried out by Cambridge University shows that, although the number of small firms seeking finance in 2007 increased only slightly from 2004, when the previous survey took place, the level of funding required soared from an average of £82,000 to £470,000. That figure is likely to have increased markedly over the past year.

Banks cutting back

"It appears that, just as the funding requirements of small businesses are increasing because of the economic downturn, banks are cutting back on both the level of facilities they provide and the services they offer," said the FPB’s Chairman, Noel Guilford.

"Accessing finance in order to maintain a healthy cash flow is always a key issue for small firms – now it has become a matter necessary for survival as much as growth."

He added: "The FPB is urging banks to recognise the difficulties small businesses are facing, and firms to take steps to protect themselves, such as seeking alternatives to traditional funding streams."

Mr Guilford listed the major concerns facing small businesses in the current banking turmoil: Reduced borrowing capacity, reduced service capacity as banks cut staff, including bank managers and relationship managers, branch closures and banks reducing their borrowing and calling in loans.

Further Banking Resources

These Bytestart guides may help you save money with your business banking:

• How to switch business bank accounts

• Choose the best business deposit account

• How to keep your bank charges low