Firms lose out as bank loans cost ‘an arm and a leg’

Banks were today accused of ripping off businesses by charging firms "an arm and a leg" for lending.

The difference between how much it costs banks to borrow money and how much they charge when lending it on to businesses is at its highest level for more than four years.

Bank of England figures showed that the three-month London interbank offered rate rate fell from 0.8% in August to 0.62% in September while the interest on new lending rose from 2.04% to 2.18%. That pushed banks' lending margin up to 1.56% — the highest since August 2005 and well above the low of 0.29% in June 2008.

Stephen Alambritis, spokesman for the Federation of Small Businesses, said: "It is a creeping increase by the banks. They are asking for an arm and a leg from small businesses.

"These are businesses that have survived the recession and should be rewarded with lower charges not by being hit by higher charges. Banks are taking advantage of businesses."

Alambritis said a lack of competition in the market, where most of the lending is done by four major banks, HSBC, Barclays, Lloyds Banking Group and Royal Bank of Scotland, meant that businesses were losing out.

The increase in the lending margin was revealed in this month's Bank of England Trends in Lending Report which also showed businesses paid back £4.6 billion more than they borrowed in September.

Philip White, chief executive of Syscap, an independent finance provider, said: "Obviously it is disappointing that lending margins for businesses continue to increase and that lending to businesses continues to fall.

"Whilst the banks may claim that the fall in loan volume is due to a lack of demand from businesses, you can't help but draw the conclusion that it is the high lending margins and fees charged by banks which stop businesses applying for loans."

A spokesman for the British Bankers' Association said that the interest charged by banks is based on two factors: the cost of funds to the bank and the perceived risks of lending to the business concerned.