SMEs frustrated by rate discrepancies

SMALL to medium-sized enterprises are frustrated that interest rates for business loans remain higher than loans in the residential sector.

Fremantle Coastal Business Centre chief executive Phil Kemp said in the current economic climate, while lenders had to ensure businesses were financially viable with prospects, he was advising SMEs to question banks over current business loan rates.

"Businesses are annoyed they're not being treated fairly by the banks," Mr Kemp told WA Business News.

"It's those businesses that have commercial loans; a lot of our clients have funded their businesses through borrowing against their homes so their interest rate has come down as home loans come down, so they've used their increasing equity in their homes to fund their business growth."

Housing Industry Association chief economist Harley Dale said movement in residential housing interest rates was not comparable to the business sector.

Mr Dale said while small business loan rates have fallen by up to 275 basis points since February 2007, variable mortgage rates have fallen by 375 basis points in the same period.

Commonwealth Bank of Australia WA general manger local business banking, Huss Mustafa, said there was no one blanket approach to the commercial lending rate.

"The interest rate for a commercial loan really directly correlates with the risk, the higher the risk the higher the interest rate, the lower the risk the lower the interest rate," he said.

"Clearly at the moment, we've seen some of the lowest interest rates in 45 years and as the Commonwealth Bank announced last week, we've actually reduced our interest rates for our business clients [with residentially backed secured loans] by 0.25 of a per cent.

"It's difficult to be able to say this is what the interest rate is because if you have a unsecured business facility the interest rate will be a lot higher to a secured facility."

Commonwealth's carded interest rate for residentially-secured commercial loans is 6.24 per cent a year, while the carded interest rate for commercially secured loans is 7.99 per cent a year.

Westpac's standard variable business lending rate for most small businesses is currently 7.69 per cent a year.

A Westpac spokesperson said the bank's business lending rate has reduced by 2.6 per cent since the Reserve Bank began cutting its official cash rate in September last year.

"We've also passed on cuts to business credit card rates through this current cycle," the spokesperson said.

Australian Bankers' Association chief executive David Bell said after 16 years of economic growth in Australia, market conditions have deteriorated significantly in response to the global financial crisis and in turn banks have needed to tighten lending criteria.

"However, banks are very much still open for business for viable customers," he said.

As at December 2008, the level of credit outstanding to small business was $20 billion greater in net terms than in June 2007, an increase of 11 per cent, according to ABA figures.

"All businesses, including banks, will be facing tougher conditions going forward and this environment necessitated banks prudently managing risk," Mr Bell said.

"Making a loan to a small business which cannot afford to repay is not good for the bank, the business, or the economy in general.

"The reason for this is that small business lending is generally riskier than household lending.

"Business conditions typically deteriorate faster and more deeply for small businesses than for home loans during economic downturns.

"The level of impaired business loans is currently fives time higher than impaired home loans, and for these reasons, the regulatory capital required by the Australian Prudential Regulation Authority to be held for small business loans can be in the order of three times higher than for home loans."