Anger as banks inflict higher loan rates on small businesses

October 24, 2008

Banks are continuing to hit small businesses with increased interest rates on their loans and overdrafts, often altering the terms of loan deals with little or no warning. In some cases, banks increasing their loan and overdraft fees even charged the companies an administration fee of as much as £250 for doing so.

The behaviour of banks has angered business groups, who had been given assurances from the Government that banks would continue to lend to small businesses at reasonable rates as a condition of the £37bn bailout deal.

Small businesses are closing at a rate of 280 a week, a seven-fold increase on the 40 a week before the crisis hit. Mark Esslemonts, who runs a menswear store in Aberdeen, got a letter from his bank, HBOS, telling him the interest rate on his company's overdraft was to be more than doubled. He was also charged a £250 administration fee.

"I know everyone is trying to make a profit, but at the moment it feels like the banks have the power to continue doing what they want," he said.

Michael Tommes, who has a small firm helping companies find finance, said several clients had been forced to renegotiate their loan repayments having initially hammered out a deal. "Companies are desperate for finance," he said. "We have a stream of new customers coming to us for help even though we have all but stopped our advertising."

Overdraft charges of £1,500 were made on Bill Wary, who owns a wine importing firm, although the charges were incurred because his bank had waited five days to cash cheques. "It isn't just the money itself, but the time and effort needed to sort these issues out," he said. "Those are precious resources for a small business owner."

John Hole, who owns a tile firm in Hereford, had a letter at the end of last month telling him his overdraft was being increased by 3 per cent, giving him an overall rate of 12 per cent.

Lord Mandelson has been highly critical of the banks. In an article in Progress magazine, he blames "banks and regulators in that order" for the crisis. In a speech to business leaders last night, he also said offering support for small businesses during the financial crisis was "top of my in-tray".

Bankers are uneasy about being made scapegoats. Angela Knight, the chief executive of the British Bankers' Association, said: "The UK banking industry has always been, and remains, a strong supporter of small businesses." An HBOS spokesman said: "Our overdraft rates for small- business customers are in line with, if not below, the competition."