Is it the end of overdrafts for SMEs?

11 March 2014

According to the latest survey from Platform Black, unsecured overdrafts are coming to the end of the road as banks withdraw more and more overdrafts from small businesses while imposing strict penalties on the remaining loans.

Often a source of finance for many SMEs in the past, they have been cost-effective and easy to arrange to help raise capital needed for the business. However, these latest figures show overdrafts significantly dropped from 25% in 2011 to 16% in 2013. The Bank of England also recently revealed overdraft lending for SMEs fell by £800 million in just December 2013. 

Banks have been making the process more complex, usually incorporating debentures over the company or withdrawing overdrafts at short notice, leaving the company struggling financially and edging towards insolvency. 

Of the 1,300 SMEs that were surveyed by Platform Black, over half (56%) have relied on a bank overdraft in the last two years. The survey also showed 46% are turning to invoice financing as an alternative source of funding. 

Referring to BoE’s latest figures, co-founder of Platform Black, Louise Beaumont stated, “These awful statistics are compounded by the main high street banks cutting their SME specialists - one of the UK’s main high street banks recently announced that it is cutting almost a quarter (600) of its specialists who advise smaller companies, as it pulls back from supporting the SME market. Indeed, I recently spoke to a business owner who said that he has had six business account managers in three years and has only met two of them.”

This goes to show businesses want a local and personal service, something which the banks are failing to do. Alternative finance, like invoice factoring and peer-to-peer lending, is becoming increasing more popular in the SME sector and will no doubt continue to act as the go-to support when banks turn businesses down.