30/04/2009 - 00:00

Interest rate cuts lost on small business

30/04/2009 - 00:00

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THE small business sector is missing out on the benefits of lower interest rates, with higher risk margins on business loans outweighing the fall in rates, new research has found.

THE small business sector is missing out on the benefits of lower interest rates, with higher risk margins on business loans outweighing the fall in rates, new research has found.

Specialist banking industry research firm East & Partners found that 68 per cent of small to mid-sized businesses (SMEs) had experienced an increase in their loan interest rate over the past six months.

Its survey of 1,500 SMEs turning over between $1 million and $20 million a year found that, on average, risk margins had increased by 2.8 percentage points over the six months to April.

This offset the 2.5 percentage points reduction in indicator lending rates over the same period.

East & Partners financial markets analyst Peter Drennan told WA Business News that in extreme circumstances, risk margins had blown out to 10 per cent.

"The way banks value securities has changed, for instance residential property is not valued as it was in the past," he said.

"The bottom line is that funding is becoming more expensive for SME business bank customers despite a backdrop of central rate decreases and federal government rhetoric insisting that rate cuts be passed on to the customer," Mr Drennan said.

The report also shows than only 51.1 per cent of SMEs are now looking to borrow in the next six months, a sharp decline from 12 months ago when 77.1 per cent of SMEs were looking to borrow.

Small Business Development Corporation managing director Stephen Moir said banks needed to recognise the importance of the small business sector and provide appropriate financial products at reasonable rates.

"Banks are aggressively chasing the SME market with targeted campaigns, websites and claims of support, but we have heard that some small businesses are even having to resort to credit cards for their overdrafts at rates of around 16 to 18 per cent, because that's all that is available to them," he said.

Westpac Bank Western Australia regional manager Jay Watson said he was sceptical of East & Partners' survey results, but did note that banks had become stricter on their risk profiles during the unprecedented economic downturn.

ANZ Banking Group managing director commercial, David Hisco, said in a statement that the global economic landscape had changed in the past six months and that the bank was looking to "further strengthen the risk function at ANZ".

Fremantle Coastal Business Centre Phil Kemp said he was surprised by the East & Partners' results.

"Nobody has said to me that interest rates have increased for small businesses," he told WA Business News.

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