Like many small business owners, Steve Kaczmarek is vigilant with his banking. The property developer says he has “never missed a beat” with his lender, NatWest.
Even so, this has not stopped the bank sharply increasing the costs of his borrowing. Before the downturn, Mr Kaczmarek paid 2.5 percentage points above base rate and a 1 per cent fee. But on his latest application for a £100,000 loan, the fee was 3.5 per cent and the rate 4 points above the base rate.
“They are saying they are offering this money but the hoops you have to jump through are ridiculous,” he says.
Mr Kaczmarek’s experience reflects a common problem. As banks look to boost margins and reduce risk, they are lending to fewer business customers.
Banks argue that higher margins are essential to cover additional costs. They need to compensate for loss-making margins on deposits, factor in a 20 per cent average increase in the probability of default and absorb the higher capital requirements being enforced by regulators.
That all adds up to a tripling of the required margin, bankers say.
The higher rates inevitably mean lower demand.
Executives at Royal Bank of Scotland and Lloyds, the two state-backed banks, admit in private that there is next to no chance of their meeting the additional £39bn of lending they signed up to when the government stepped in to insure their toxic assets in March.
Though they look set to hit the mortgage portion of the pledge, both banks have been lending far less to corporate clients than the £27bn extra they should be making available.
They have had to dramatically scale back lending after suffering severe losses from an overzealous appetite to lend in the boom years.
Steve Pateman, head of corporate and commercial banking at Santander UK, a fairly new entrant to the market, argues that the banks lending most aggressively before the downturn have been hit hardest.
“There has been something of a knee-jerk reaction and margins have moved up too far, without any real regard for risk,” he says. “Banks didn’t really know who or what they were financing and have had some unpleasant surprises.”
Mr Pateman notes that Santander is intending to increase its lending to businesses by 18 per cent this year, slightly ahead of its target.
The state-backed banks insist they are doing what they can to accommodate small and medium-sized enterprises. Unpublished figures suggest RBS is only about 10 per cent away from its additional lending target for small businesses.
Meanwhile, Lloyds has reopened its Bank of Scotland operation to new lending, after being forced to shut its doors in the wake of last year’s bad debt fall-out.
Nevertheless, it has emerged this week that there is suspicion in Whitehall over the banks’ stance on lending to SMEs.
Officials are probing whether loans are being priced at deliberately high levels in order to deter business.
However, Jason Green at PwC believes the state-backed banks are far more active than they were six months ago.
“We have been inviting a number of banks to look at lending opportunities and pitch terms and in some cases the state banks have a higher appetite,” he says.
If entrepreneurs such as Mr Kaczmarek are feeling squeezed now, once interest rates start rising – which is widely expected next year – life will start getting even tougher.