By Claire West

Small businesses are now being charged bigger margins on bank loans than they were a year ago, meaning the cost of borrowing for small businesses is still rising, reveal new figures from Syscap, the UK’s leading independent finance provider.

Relative to the Bank of England base rate, lending margins charged to Small To Medium Sized Businesses (SMEs*) have increased from 3.53% in August 2009 to 3.84% in August 2010. Alternatively, lending margins relative to Libor show a similar increase, from 3.23% in August 2009 to 3.59% in August 2010 (see graph below).

Philip White, Chief Executive of Syscap comments: “This hike in lending margins simply confirms the experiences of many SMEs who have struggled to obtain affordable finance from their bank.”

“It will be all the more galling given the fact that banks have cited a lack of demand for the drop in lending to SMEs. These figures appear to put that argument to bed. Falling demand and increased supply of lending would lead to smaller lending margins, not bigger margins.”

“Banks are still suffering from legacies of bad debts and are still having to reserve capital, which has evidently left them unwilling to bring lending margins down, but also free to raise them.”

“It is no surprise that so many more SMEs are now turning to alternative financing arrangements - a trend I expect to last if small firms continue to be priced out by their high street lender.”

Separate research recently conducted by Syscap revealed that 73% of businesses still feel the lending margins on their loans are too high, which is only a small improvement on the 75% of businesses who thought so last year.

Philip White adds: “We’ve been hearing this message from SMEs for over a year now, despite major banks claiming to be doing all they can to return to ‘business as usual’.”

“With the private sector expected to pick up the slack from public sector cuts, it is vital that funding streams to UK SMEs are kept open.”

*Businesses with an annual turnover of less than £1m