SMEs facing death of the bank overdraft

This is a guest post from Louise Beaumont, co-founder of Platform Black

Overdrafts have long been the lifeblood of small and medium sized enterprises (SMEs) with almost half of all traditional bank finance products used by SMEs being overdrafts. This is because overdrafts have traditionally been a flexible and cost effective way to access working capital. However, there is worrying evidence to show that the majority of banks are withdrawing these vital overdraft facilities from SMEs.

The most recent Bank of England (BoE) statistics show that SME overdraft lending fell by over £800m in December 2013 alone. Withdrawing overdraft facilities can be done at very short notice and without discussion. This leaves businesses under extreme financial pressure, with some teetering on the edge of bankruptcy.

Platform Black, one of the UK’s leading invoice trading firms, surveyed over 1,300 SMEs about the importance of bank overdrafts. The results from the survey backed up the evidence that SMEs now have to survive without the lifeline of the flexible bank overdraft. Here’s what our survey showed:

  • 56% of those surveyed have relied on a bank overdraft facility in the past two years and 32% of them in the last 6 months
  • 1 in 5 (20%) of the SMEs surveyed have seen their bank cut back or suggest a restriction on their overdraft facility
  • When asked about other methods of financing their business, 40% use a credit card, 8% use a bank loan, 48% use invoice financing and 24% turn to leasing or hire purchase, clearly showing the need for alternative financing

Banks are now trying to replace the overdraft with other much more onerous products such as loans, which include a debenture over all the assets of the business, even if the loan is for a much smaller amount. These debentures often mean that the SME is unable to use any other form of finance from a different provider and becomes totally beholden to the bank. In addition, the OFT have expressed concern that the banks have been deliberately obstructive in sharing documents with alternative finance providers and granting waivers on debentures, thus hindering the ability of SMEs to obtain other forms of finance.

Despite this, a growing number of businesses have spotted the risk and are looking for alternative solutions so that they won’t be as affected if or when their bank pulls their overdraft facility. Data from the Asset Based Finance Association shows that invoice factoring and discounting within the UK has grown by 10% from 2012 to £275 billion in 2013.  Invoice Trading is fuelling this growth, as there are no lock-ins and firms can access finance as and when they need it, at a price that they determine – or less.

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  1. acventure:

    Thank you for sharing.

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