Overdraft squeeze on small businesses

Small businesses are finding it harder to agree overdrafts with their banks, according to a recent study by IT finance provider Syscap. The total value of all outstanding bank overdrafts drawn by small firms in the UK stood at £15.4 billion in June 2013, compared with £18.4 billion in 2012 and £20.3 billion in 2011 – a reduction of 29 per cent in just two years.

 

Although the company conceded that banks have begun to tentatively increase their small business loans in recent weeks, it’s a tiny amount in comparison to the value of overdrafts that have been withdrawn in the last year – potentially forcing more small businesses to look elsewhere for short-term credit.

 

“Banks are being forced to hold more capital against the loans they write, and that capital has to come from somewhere. Small business overdrafts are an easy target for banks, as they can be withdrawn with little or no notice,” said Syscap chief executive officer Philip White.

 

He added that overdrafts have traditionally represented a “basic building block” for small businesses that allow them some flexibility with their cash flow. With this relied-upon source of credit now diminishing, even costs like VAT bills can create a crisis – particularly as, unlike loans, overdrafts can be withdrawn at any time without notice.

 

“This shows how crucial it can be for businesses to explore alternative forms of funding, that can provide the flexibility they need. If businesses find that their overdrafts disappear just when they need them most, it can unnecessarily threaten the viability of otherwise healthy businesses,” said Mr White.

 

As part of Small Business Week, which runs from September 2nd to the 8th, the Federation of Small Businesses recently partnered with the British Bankers’ Association to give small firms advice on how to improve their chances of successfully applying for a loan. Businesses seeking credit were advised to ensure their business plan was in good shape, develop their financial expertise and check their credit record before applying for a loan.

 

The organisations also recommended being honest and up-front about a business’s financial situation, and asking the lender for feedback if their loan is declined so they know where to improve next time. Small businesses were also advised to make use of the independent appeals process which has been agreed by the main high street banks in the UK, which could result in a refusal being overturned.

 

This post is brought to you by small business insurance specialist Jelf.