Overdrafts falling for small businesses

SME bank overdrafts are dying out, according to research, with the value of lending them falling by £100 million a month.

Figures from Funding Options have shown that, at the end of March, SMEs were borrowing around £12.1 billion in bank overdrafts. This was a sharp decrease from almost £14 billion being borrowed at the end of September 2014.

The decrease represented a larger decline, with the value of bank overdrafts to small businesses believed to have fallen by 42 per cent over the course of the last five years. This figure reportedly totalled £20.9 billion in 2011.

This form of lending is now considered particularly unattractive by banks, who have slowly reduced it following the 2008 recession.

Banks are required to retain high levels of regulatory capital if they wish to include higher amounts of unsecured lending on their balance sheets; especially if the lending is to small businesses.

Many industry professionals think there’s virtually no chance of the trend being reversed and as a result, it’s becoming increasingly important for small businesses to source alternative funding options to ensure their cash flow and growth opportunities continue.

Conrad Ford, CEO of Funding Options, said: “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.

“Given that overdrafts are unsecured, with no set repayment terms, they have fallen out of favour with regulators and banks are cutting their exposure to them in response.”

It’s unlikely the banks will withdraw overdrafts that are already being used, but it is possible that they’ll look to reduce the amount of overdraft options available to businesses once the companies themselves have reached a healthier financial position.

Date published 27 May 2016 | Last updated 27 May 2016