The cost of lending to small to medium-sized businesses could rise further because of new proposals by the Government to improve access to rescue finance for distressed businesses.

This is the view of Syscap, an independent financing provider.

Under proposals put forward by the Insolvency Service the rights of existing creditors to security over borrowers’ assets could be overridden to make it easy for distressed companies to obtain rescue finance from other lenders.

According to the consultation paper, companies in administration often find it difficult to raise finance when they cannot use their assets as security because existing loans are already secured against them. The consultation proposes that the security of existing loans over assets could be overridden to make the provision of finance to insolvent companies more attractive to new lenders.

According to Syscap, the risk of allowing the rights of existing creditors to be overridden is that they will raise the cost of lending to SMEs to offset that risk.

Philip White, chief executive of Syscap, said: “This proposal says that a lender’s security over assets could end when the company gets into trouble. That is exactly when a lender needs to have security over the assets they have lent against.