Is the removal of business overdrafts hampering SME growth?

High street banks are withdrawing overdrafts for small firms at a rapid rate, according to new figures from Funding Options.

A third of small business have seen their overdrafts reduced during the last two years, restricting working capital and therefore limiting their growth potential.

Meanwhile 17% of firms have revealed their overdrafts have been cut altogether, as banks seek to reduce risks on balance sheets.

According to Bank of England data, £5 million worth of SME overdrafts have been cut since 2011, posing an issue for companies who rely on the extra finance to manage their cash flow.

Funding Options suggest the trend is unlikely to stop anytime soon either, placing pressure on SMEs that need to find a source of funding to replace that which is lost.

It is particularly a problem for businesses that can have peaks and troughs in their trade, as overdrafts will often be removed when cash supplies are plentiful, with little regard given to the fact the situation may change.

Cuts to overdrafts were also noted by the Forum of Private Business, who suggested usage dropped from around 25% in 2011 to 17% this year.

With no overdraft facility in place, SMEs need to place a greater emphasis on financial management – especially as the costs of doing business are increasing and late payments are at an all-time high.

These issues can cause more problems than previously for firms as there is no longer a facility in place to protect them if they overspend.

This can place businesses at risk of corporate insolvency as they can lack the funds to overcome the situations they face.

In such situations a firm should seek assistance from insolvency practitioners in order to gain an understanding of what support may be on offer for them.

Where possible, businesses should look to take a tighter grip on their finances in order to limit the impact that losing an overdraft facility might have.

This is especially important given that two thirds of SMEs told the Competition and Markets Authority that they wanted overdrafts, while 83% revealed they were viewed as the best way of dealing with late payments, cash flow shortages and unexpected expenses.

By Phil Smith

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