The British Bankers’ Association (BBA) has set out the process of interest-rate calculation for bank lending to small businesses in a new factsheet.
‘Small Business Lending – How Banks Set The Price For Loans To Small Businesses’ sets out the factors which govern the cost of credit, focussing on the three key drivers:
- Cost of funds (the price banks pay to borrow money to lend on to businesses, and the cost of using multiple short-term deposits to fund long-term arrangements with businesses).
- Cost of risk and capital (the calculated likelihood of the borrower’s ability to pay back the loan, and the amount the bank is required to set aside as regulatory capital).
- Administration costs (often proportionately more expensive with small businesses than with larger enterprises).
BBA chief executive officer (CEO) Angela Knight said: “Lending to small businesses is one of the fundamental roles of a bank. It is vital to economic recovery, and to the restoration of trust in the banking industry, that lenders and borrowers have an open and frank discussion about the realities of providing loans in this economic climate, and the practicalities of meeting customers’ expectations. This factsheet aims to help that discussion to take place.”
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