Undervalued security could be hitting business lending

19 August 2010

Inaccurate property valuations are stopping smaller firms from securing bank loans, it has been claimed.

According to the Forum of Private Business (FPB), banks often undervalue properties when considering them as security for business loans.

The result, the FPB argued, is that a number of small firms either must depend on high interest rates on credit or are denied finance altogether.

Research by the FPB found that smaller businesses can expect to pay more than double the interest rate on unsecured loans than on borrowing that is backed up by assets.

As an average, the FPB members polled were charged interest rates of 11.8 per cent on unsecured borrowing, compared with 4.5 per cent on secured lending.

Of those business owners who offered security, 74 per cent put forward either a commercial or residential property against the loan.

This, the FPB said, showed the importance of fair and accurate valuations.

Andrew Bacon, the FPB's advisor on property issues, commented: "One of the root causes of the crisis of lending on commercial property is the lack of transparency in the UK's commercial property market. 

"This has left many valuers with inadequate market data that, given economic conditions, will make them more pessimistic, resulting in lower valuations on commercial properties. This means many banks will subsequently have a limited appetite and ability to lend to businesses."