SMEs urged to consider fixed rates as they become much cheaper than variable loans

Small- and medium-sized enterprises are being urged to consider locking in fixed rates as the big bank chiefs warn of rising wholesale funding costs and fixed rates become “considerably cheaper” than variable loans.

According to banking comparison site Mozo, although there is no clear evidence that the European debt crisis is affecting the banks’ appetite for business lending, fixed rates and variable rates have not moved entirely in concert over the past six months.

Mozo says of the 11 of the fixed rate business loans in its database, eight have fallen since July, and the average one-year rate is down 0.57% to 7.48%.

Those with longer loans fare even better, Mozo says, because two, three and four year terms are down 0.7% to 7.53%, 7.61% and 7.94% respectively.

For variable rate loans, just one-quarter, or 12 of 48 in the Mozo database, have fallen over the same period.

“Overall, the average variable rate for businesses is down just 0.1% (to 9.66%), despite the November Reserve Bank rate cut of 0.25%,” Mozo says. Banks that are yet to cut their variable business loan rates include Westpac, Bendigo Bank and Commonwealth Bank.

Banks reported record first-half profits this bank reporting season, but cautioned on increased cost of funding in wholesale markets. They are also considering the impact of reforms designed to boost their holdings of liquid assets, thereby creating a bigger buffer in the event of another GFC.

But Andrew Dickinson, financial services partner at KPMG, says notwithstanding the risks overseas, banks will continue their push into SME lending, due to weak demand for housing and corporate lending.

“There’ll be plenty of funding to good quality creditors,” Dickinson says.

But Dhruba Gupta, managing director of DBM Consultants, says increasing pessimism among SMEs mean that access to funding is hardly a pressing issue for small business.

“It’s more about survival,” Gupta says.

For businesses with less than $5 million in revenue, Gupta says they are much more concerned about “basic uncertainties, the next revenue stream, how to manage their costs, how to keep staff and manage cashflow”.

“Less than 10% actually raise their hands about having problems with getting money,” Gupta says.