Small businesses that depend on banks for extra capital are being harshly treated, with around £5m worth of overdrafts being taken away from SME owners every day, according to the Bank of England.
Some SMEs rely heavily on overdrafts
According to the Competition and Markets Authority, just under half (48 per cent) of all UK SMEs had credit cards and a similar number (43 per cent) had overdraft facilities in 2014.
As well as this, around 90 per cent of SMEs go to their main bank for overdrafts, general purpose business loans and credit cards respectively; 69 per cent go to their main Business Current Account (BCA) bank for invoice discounting and factoring and 76 per cent for commercial mortgages.
Despite these statistics, banks aren’t keen on giving smaller firms extra cash. According to a survey of 250 business owners, 17 per cent of them have said that their overdrafts have been completely removed, with a further 30 per cent revealing that their overdrafts have been significantly reduced over the past two years.
The Bank of England has found that since 2011, £5m worth of small business overdrafts have been removed every single day.
The Forum of Private Business (FPB) discovered that 16 per cent of businesses felt that difficulties in obtaining access to finance from their bank was an ongoing worry, particularly for those looking to survive or grow using external finance.
Why are banks doing this?
It’s unclear as to why banks feel like it’s a good idea to remove overdrafts from small businesses, an industry that makes up over 99 per cent of the private sector, but one theory is that the banks give out overdrafts on a month-by-month basis.
Conrad Ford, head of business finance group Funding Options, told The Telegraph that companies such as hotels will have their overdrafts removed in periods of high growth (usually in the summer), but will not see it return in the winter months when they rely on extra funds.
‘‘The withdrawal of overdraft facilities is a significant problem for SMEs,’’ said Ford. ‘‘A big reduction in the level of working capital available is not just a one-off blow for a small business but presents ongoing problems until replacement funding is found or built up.’’
Ford added that the problem of reduced overdrafts is expected to continue for some time.
What’s next for SMEs?
With overdraft facilities dwindling, SME owners are turning their attention towards alternative finance.
According to an analysis of Companies House records, Funding Options found that small business owners are using £76bn worth of alternative finance after they were turned down from the banks when asking for an overdraft.
Small businesses are also turning to the BoE for funds. Back in May, the central bank released its quarterly figures for its Funding for Lending scheme, whereby SMEs would gain extra cash in exchange for collateral.
The scheme wasn’t very successful in 2014, but net lending to SMEs increased by £635m within the first 3 months of 2015, with Lloyds contributing £425m to small and microbusiness owners.
This shows that although banks are unwilling to help out with overdrafts, they are not against the idea of bankrolling small firms.
‘‘Borrowers should feel confident about applying to their bank for finance,” said Irene Graham, executive director of business finance for the British Bankers Association (BBA).
‘‘Nearly eight out of ten businesses that applied for finance in the past 18 months were given the green light. Banks are helping smaller businesses do what they do best – drive economic growth and create jobs,” continued Graham.