Large portion of SMEs have had overdrafts removed or reduced

Some 30 per cent of small businesses have seen their overdrafts slashed or removed in the past two years, according to a study.

Online business finance supermarket Funding Options explains that the results of its survey of SME owners support their recent analysis of Bank of England figures which show that the total stock of SME overdrafts has tumbled by £5 million per day since 2011.

This decline in business overdrafts is likely to be permanent, with tighter rules on banks’ capital controls since the credit crunch meaning that small business overdrafts are unlikely to ever rebound to pre-crisis levels, the company says.

The effect of this change has been to erode the working capital of SMEs, and restrict their ability to invest for growth.

Conrad Ford, CEO of Funding Options says that we are witnessing the end of the business overdraft as a reliable source of funding for small businesses and for SMEs this is a painful process.

‘The withdrawal of overdraft facilities is a significant problem for SMEs. A big reduction in the level of working capital available is not just a one-off blow for a small business but presents ongoing problems until replacement funding is found or built up.

‘Small business owners are increasingly using alternative forms of finance, but there is still a knowledge gap about the options available. Many businesses don’t know there are cost effective alternatives to overdrafts and give up once their bank has turned them down. The new small business lending referral scheme should prove a vital link in informing SME owners about different forms of financing.’

SME owners are turning to alternative sources of finance to meet their working capital requirements. Funding Options research shows that UK SMEs are now using £76 billion of alternative finance as banks continue to pull back from lending to smaller businesses.

Alternative lending to SMEs is now equivalent to 46 per cent of the value of traditional term loans and overdrafts, which has fallen to £163 billion. That represents a fall of 5 per cent from £172 billion a year ago, and 17 per cent from £197 billion four years ago.

Ford adds, ‘The paucity of bank lending to SMEs has been widely reported in recent years and this has been a major drag on the economy. However, we are hopeful that the number and value of term loan lending has begun a tentative recovery.

‘Unfortunately, the problem of reduced overdrafts is unlikely to abate.’

Further reading on overdrafts

Ben Lobel

Ben Lobel

Ben Lobel was the editor of from 2010 to 2018. He specialises in writing for start-up and scale-up companies in the areas of finance, marketing and HR.

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