THE BANKING crisis has been tough on small businesses. Not only has the availability of credit contracted enormously, leaving many businesses without sufficient overdrafts or access to funds to supply inventories, but banks have been using their business customers to support margins by charging them higher rates to offset funding costs.

So while banks have done everything in their power to keep rates low for personal customers - until Irish Life & Permanent broke ranks and announced a rise on existing standard variable rate mortgages - they haven't been shy about making up the difference by soaking their business clients.

Now things are getting tougher as the banks look for new ways to grab share in a shrinking recessionary market. The latest move is to compel business customers to transfer all their accounts to get access to loans in the first place. In other words, when you apply for a business loan, the bank tells you to bring over your whole banking relationship - current account, foreign exchange, credit cards and, especially, deposits ? as a quid pro quo for extending credit.

"If they want a loan from us, they have to bring all their business over," a senior banker from one of the big two Irish banks told the Sunday Tribune.

In fact the big two - AIB and Bank of Ireland - are using the credit squeeze, which is affecting some of their competitors more harshly, to secure market share in business banking just as they are doing in the mortgage market. With challenger banks such as Bank of Scotland Ireland and even traditional rival Ulster Bank being restrained by their foreign parents from lending in Ireland, the big two are the only game in town - and they know it. That means they can dictate terms to borrowers who come looking for fresh credit, while still attracting what new business is out there.

One market source told the Sunday Tribune that two large Ulster Bank business customers had recently approached Bank of Ireland about defecting. Business customers have been said to be leaving BOSI and Anglo Irish Bank over the last several months as well. BOSI, Anglo and ACC have been leaking billions in deposits this year - a sign business is moving elsewhere.

"They [AIB and Bank of Ireland] are certainly now in a position to start picking off customers from the other banks," said Davy banking analyst Emer Lang. "The question is whether they can afford it."

Banks have always taken fatter margins from their business customers, which makes business banking particularly attractive. The banks do this mainly because they can: it is easier for a business to pass on higher borrowing costs to their own customers than it is for, say, a mortgage borrower to find extra money to afford higher rates.

But the disparity between business and personal borrowing is pretty big at the moment. With European Central Bank rates at an all-time low, personal borrowing is exceptionally cheap, with most banks charging 2.5% or lower on home loans. Business loans are attracting much higher rates, however. Davy estimates average margins on business lending at the Irish banks are as high as 5.7%. Moreover, where the rate trend has been mostly downward on personal lending, business loans have been getting more expensive - even when base rates fall.

That's because Irish banks are still paying unusually high funding costs, both for deposits and wholesale money. It is these factors, according to the latest Central Bank lending survey, that are causing credit to contract. "An increase in banks' cost of funds and balance sheet constraints and greater risk perception contributed to the tightening," the bank said.

"Everyone knows you can basically pick up the phone to any bank and easily get 3.5% for your deposit," said Lang.

That expense drives the cost of borrowing for business. And, as Davy research analyst Scott Rankin observed last month, the banks are still not repricing fast enough to cover increased funding costs, which means real margins are eroding even as business owners struggle with higher prices.

Not surprisingly, businesses are unhappy about carrying the can for the banks' funding woes.

"There is no doubt there has been a deterioration in competition and there is no doubt that the criteria for lending - the whole lending environment - has become worse as a result," said Jim Curran, head of research for business lobby group ISME. "The bargaining power of small businesses has reduced further, while the banks have increased fees and charges."

"Businesses can't access credit. When they can, they face higher fees and charges, and the margins remain high," he said. "They're being tied up, effectively. We see a very long tunnel ahead."