Funding Options, an online business finance supermarket have surveyed data held at Companies House on 160,000 businesses and found that UK SME’s unable to access traditional term loans and overdrafts, were now using £76Bn of alternative finance.
It found that alternative lending to SMEs is now equivalent to 46pc of the value of traditional term loans and overdrafts, which have fallen to £163bn, down 5pc from £172bn a year ago, and 17pc from £197bn four years ago.
The Telegraph today reported that Overdrafts for small firms are being withdrawn or reduced by the high street banks at an alarming rate, it has emerged, restricting working capital for hundreds of thousands of British businesses and hampering their growth.
Around 17pc of the UK’s small-to-medium-sized enterprises (SMEs) have reported that their overdrafts have been removed altogether and a total of 30pc have seen reductions imposed over the past two years, according to a survey of 250 business owners.
Data from the Bank of England has shown that since 2011, £5M worth of overdraft facilities have been removed from SME’s every day by banks in order to reduce the risk on their balance sheets.
Banks have been systematically decreasing the number of overdrafts on their books since stricter capital controls were imposed in 2009. The controls ensure that the banks have to hold reserves to cover the full overdraft facility and not just the amount being utilized.
Small business overdrafts can be cancelled with little to no notice which makes them an easy target for banks.
The lack of an overdraft can seriously hamper a SME’s growth which had traditionally given businesses some breathing room with their finance. They are especially important for businesses that see their peak demand in certain months, such as hotels.
Findings from the Competition & Markets Authority (CMA) found that although two-thirds of SME’s wanted the use of an overdraft, only 37% were offered one by their bank.
With overdrafts becoming increasingly harder to obtain, many companies are looking at alternative borrowing options. Invoice Financing is now a popular method of gaining capital.
Worryingly, increasing numbers of business owners are now relying on personal credit to keep their companies afloat. According to the SME Access to Finance study, 13% of SME’s Directors have relied on personal loans and credit cards to get by over the past 12 months. Bev Budsworth from The Business Debt Advisor adds, “apart from seriously increasing the risks for the directors, this can be an expensive line of credit requiring the director to draw extra sums from the business to fund repayments. Also if the company failed, repaying these loans could be seen as preferential repayment of a director’s loan account and then be subject to challenge.
Bev adds, “Another reason for the bank’s wanting to reduce overdrafts is the risk of not being at the front of the queue to be paid if the company fails. Generally bank overdrafts are personally guaranteed and are also sometimes secured on the company’s assets by a charge. The bank generally has to get their funds after the costs of winding up and preferential debts have been paid (preferential debts include arrears of wages, holiday pay, pension contributions, etc).
If your business is struggling with financial difficulties you could benefit by talking to one of our specialists at The Business Debt Advisor by calling 0800 781 0990.
We can advise both individuals, self employed businesses and professionals as well as directors of limited companies on all appropriate options including IVA’s, CVA’s, PVA’s, Administrations and Liquidations.
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