Banks slashing small business overdrafts more sharply than bank loans

19th June 2014 | News

SMEs are being forced to endure a ‘hidden credit crunch’ with overdrafts slashed by 23 per cent in the last two years, while traditional bank loans were cut by just nine per cent.
LDF, a leading finance provider for businesses, believes banks are cutting small business overdrafts much more sharply than traditional bank loans.
LDF explains that in the two years prior to the end of March 2014, the value of small business overdrafts fell by 23 per cent, from £18.2bn to £14.1bn. Over the same period, traditional bank loans to SMEs fell by just nine per cent, from £187bn to £170bn.
They say the banks’ ability to offer credit to small firms is being constrained by regulators’ capital holding requirements.
The reduction of overdraft facilities is simply an easy target for banks looking to reduce their small business lending books, as overdrafts can be withdrawn almost immediately.
However, the immediate withdrawal of overdrafts could see the rug being pulled from beneath many SMEs who have previously relied on their overdraft to cover the cost of short term funding requirements such as equipment purchases, VAT and Corporation Tax.
Peter Alderson, managing director of LDF, said: “A lot of attention is paid to the amount of term lending banks provide to SMEs, but the withdrawal of overdrafts is the hidden credit crunch for small businesses.

“Overdrafts have traditionally been one of the most commonly-used financial tools for small businesses, but it’s becoming increasingly difficult for SMEs to rely on them to adequately manage their cashflow.

“If their overdraft facility is withdrawn or slashed, a lot of SMEs could find that covering the cost of essential business expenditures, such as Corporation Tax or VAT bills, is a real struggle.”
LDF adds that even law and accountancy firms, which banks previously viewed as ‘good credits’ before the credit crunch, are seeing their access to lending diminish.

This could be particularly difficult for those who approach the 31st July deadline for self-assessment tax payments – one of the major pinch points of the financial year.