There are two key ways banks fund their lending activity to SMEs; through deposit taking from their customers and, where the lending requirements exceed the value of the deposit base, through borrowings from wholesale money markets. When providing Loans or Overdrafts to SME’s, banks tend to quote an interest rate made up of a ‘cost of funds’ using a market reference rate, plus a margin. With regard to the ‘cost of funds’ it is clear from the explanation below these reference rates no longer reflect the true cost of funds to the banks. Like any business a major determinant of the price is the cost and availability.
