By Marcus Leach

Small businesses are paying higher interest rates on their overdrafts than at any time in almost three years, says Syscap, one of the UK’s leading independent finance providers.

The average interest rates being paid by businesses on their overdrafts hit 3.46% in September 2011, the highest rate since February 2009.

Syscap points out that smaller businesses are likely to be paying up to twice this rate of interest on their overdrafts, and even more for new companies and first-time borrowers. Small business borrowers are also now facing higher additional charges including arrangement and annual fees, as well as on-going management fees and potential penalty charges.

“The Eurozone crisis has sent average business overdraft rates shooting up to their highest level in nearly three years, despite stability in the central bank rate,” Philip White, Chief Executive of Syscap, said.

“This is causing real pain for small businesses, whose overdraft rates are always much higher than the overall average, and who can be paying up to 3% on top of that in additional charges.

“Unfortunately, with banks still failing to make other types of loan more widely available, an expensive overdraft is frequently the only form of business borrowing available from high street lenders.

“As a result, it’s hardly surprising that small businesses are looking to leasing and other forms of asset finance for more sustainable alternatives to funding investment than through an overdraft or bank loan.”

Syscap explains that although some parts of the asset finance market have been impacted by the reduction of wholesale funding by banks, some non-bank asset finance providers are now in a much better position to lend than some banks.

Asset finance has been playing an increasingly important role in funding businesses’ expansion. In the last twelve months (to end September 2011), a total of £20.9 billion of asset finance has been supplied, up by 8% on the previous year — while bank lending to businesses has stagnated or fallen.

Leasing and asset finance are frequently preferred by SMEs as a form of funding because:

· They do not impact on a businesses’ other credit lines, giving the company concerned more scope to borrow money when they need it in the future

· They are more stable forms of borrowing than overdrafts, which normally have variable interest rates, and can be withdrawn or reduced

· Leasing allows a company to upgrade their equipment before it becomes obsolete

· Leasing qualifies as a trading expense, so is therefore tax deductible

· Leasing fuels investment in manufacturing and IT assets

Research by Syscap conducted in the autumn revealed that small businesses were unhappy with the availability and cost of other types of lending offered by banks.

75% of small businesses surveyed felt that the bank lending margins on loans were too high, up from 73% the same time last year.

A third said that their ability to access bank loans had got worse over the last year, with 12% of businesses saying that their access to bank loans has worsened further since the spring.

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