Small businesses fall back on overdrafts

SMEs have been forced into paying higher rates through bank overdrafts thanks to the scarcity of business loans.

Some 30 per cent of small business applied for a new bank overdraft facility or extension in the last two years, while 21 per cent applied for a business loan, says financial advisors CreditPal.

Chris Poll, CEO of CreditPal, says: ‘Business operators may feel an affinity with their current account provider, so seeking an overdraft extension rather than a loan from another provider may seem a more appealing option. The rates of interest they face paying, however, are likely to be far higher than for a business loan.’

According to the British Bankers Association, the total value of SME overdrafts now stands at just over £9 billion.

But many small businesses believe that rates charged on business loans are artificially high. Research from Durham University found that the average administration fee charged by lenders under the Enterprise Finance Guarantee scheme is £2,430, with interest rates set at around 5.9 per cent.

Base interest rates have remained at 0.5 per cent since March 2008.

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