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New research suggests bank charges are hurting SMEs, says Forum

High bank charges are hurting small businesses already struggling with cash flow issues, new research carried out by the Forum of Private Business suggests.

The study, carried out among the not-for-profit group's membership, also saw an increase in firms reporting banks asking for harmful levels of collateral in return for finance.

The main financial concern for SMEs however, remains the rising cost of doing business, which was cited by 42% of respondents taking part in the Forum's cash flow and finance study. This was, however, significantly lower compared to last year's results which saw the figure at 54%.

But concerns around cash flow and late payment are on the up, from 33% last year to 38%. Concern around access to finance also increased, from 17% to 23% this year, and the actual cost of finance, from 6% to 8%. Lack of choice for finance at 19% was down marginally from 20%.

"As a financial concern the rising cost of doing business has abated slightly, which perhaps ties in with inflation having fallen recently, but it's clearly still a real and present issue for small firms," said the Forum's Chief Executive, Phil Orford.

"Overall though these results are more alarming simply by the picture of deterioration they paint with regards to SME finances. There's little doubt that this is being driven by the banks ongoing failure to deliver affordable finance to small firms, and it seems the banks are also now making even greater demands on SMEs to secure loans.

"The data also suggests there is a growing feeling of unease around cash flow and late payment among business owners, and there's certainly an argument that this is also being driven by the banks' lending dip. It stands to reason if finance is difficult to come by, cash flow becomes harder to manage, and the effect of this can be felt right through the supply chain. Our research shows 38% of businesses still reporting late payment as a problem despite the government's recent efforts to address this bad practice." 
The Forum data also polled respondents on attitudes to banks in several key areas, with ratings from 1 to 5: 1 being no issue to 5 being seriously damaging, with anything over 3 classed as harmful to their business.

Bank charges scored the highest with an average rating of 3.6 – up from 3.23 on identical Forum research undertaken in 2006. Collateral requirements averaged 3.2, up from 2.88; reduction or calling in of loan/overdraft was up from 3.16 to 3.5. Perhaps not surprisingly the availability of finance saw the biggest leap, going up from 2.43 to 3.3.

"In not one of the indicators did the banks improve – that's pretty poor by anyone's measure," added Orford.

"We know the banks are still shy to lend, and now this research reveals a palpable fear among business owners that their credit could be withdrawn. If a business overdraft is withdrawn or reduced, it's the removal of a safety net which then exposes the business to charges if they run in to unexpected cash flow issues at a later date. 

"It's common knowledge that the banks are looking to repair their balance sheets and a cynic might say this is one way of achieving that."

As part of the same research the Forum asked members whether there was a need for better credit control guidance to help SMEs better manage their finances. 39% felt that it was a good idea.

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