Small business overdrafts drying up

Posted on May 25th, 2016 | Personal finance

Small business overdrafts can be a vital option for many, but new research has found that the amount of credit available to small businesses through bank overdrafts is drying up.

Figures published this week by finance platform Funding Options show that the value of overdrafts available to small firms has dipped by £1.8 billion to £12.1 billion since September 2014. This represented a fall of roughly £100 million a month, Funding Options said, and is largely a result of tighter regulatory requirements faced by banks.

The company’s CEO, Conrad Ford, said:

“£100m is being chopped from small businesses’ overdrafts every month, and even the most successful SMEs are at risk of their overdrafts being cut with almost no notice.

“Demand for SME funding is still as strong as ever, but the fact is that banks have to question the logic of extending overdrafts to this section of the economy. This is not so much about small business’ ability creditworthiness — this is purely a result of how banks are being forced to operate post-credit crunch.”

Ford added that regulators had been particularly worried that, since overdrafts were not secured against any business assets, they had the potential to present a significant degree of risk to lenders.

SME overdraft lending down 42%

Funding Option’s research found that current overdraft levels were even lower in relation to their pre-credit-crunch highs. Over the past five years, the value of this type of lending to SMEs was down 42% from almost £21 billion in April 2011.

Ford said that one of the biggest issues facing small businesses was the ease and speed with which overdraft funding could be withdrawn. “The comparative lack of formality as opposed to a loan, for instance, means that access to an overdraft is not set in stone,” he said.

Losing access to an overdraft could be a particular problem for firms with seasonal fluctuations in revenues, for example businesses in the tourism sector, Funding Options said. This was because banks were often more likely to cut overdrafts when customers appeared to be in a financially healthy position – but for seasonal businesses, this could result in the loss of a valuable buffer needed during quiet periods.

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Written by Chris Torney

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