Bank pressure pays off – HSBC adds £1 billion credit for SMEs

In response to small businesses struggling to get access to working capital, HSBC has announced that it will be making an extra $5 billion in credit to SMEs globally, of which £1 billion will be made available to firms in the UK.

The move comes following mounting pressure from government and small business lobby groups for the banks to do more to support their SME customers as the credit crunch continues to cause headaches.

A survey released today by the Federation of Small Businesses (FSB) shows that 30% have seen an increase in the cost of new or existing borrowing over the last two months.

As a result the FSB plans to confront the ‘scrooge-like’ tactics of the banks at the next meeting of the government-backed Small Business Finance Forum which takes place today.

Banks have come under heavy criticism for not passing on recent interest rate cuts to customers.  Nevertheless, Lloyds TSB last week announced it would do just that and its new partner HBOS also promised to make lending to SMEs easier.

But bank lending to SMEs is not just about base rate.  Most borrowing is priced at base rate plus a percentage margin to reflect the relative risk of the loan.  This is where banks could widen their margins, if not watched closely.

Mark Hemingway, head of retail media relations at HSBC, said on this point:

We’ve passed on bank base rate reductions in full to our SME customers and we’ve not extended the margin above base which we charge for borrowing, although that figure varies on a case-by-case basis.

It’ll be interesting to see quite how much of this extra bank borrowing UK small businesses are likely to use.

HSBC alone has 1 million UK SME customers.  The £1 billion therefore represents an extra £100 to ease the working capital headaches of each firm.

Nevertheless, the HSBC move is to be welcomed.  It’s good to see banks recognising that small businesses are going to dig us out of the hole our giant financial institutions have in part created.

[Picture credit: jonboy mitchell licenced from Flickr]