Will SME overdrafts soon be a thing of the past?

A survey by business lender Funding Options has revealed that 30% of small firms have had their overdrafts cut in the last two years. How will this trend impact UK SMEs?

Shrinking overdrafts

Delving deeper into the aforementioned survey shows that around 17% of SMEs have lost their overdrafts entirely. Moreover, the data indicates a geographic divide – 55% of regional SMEs have endured cuts compared to just 25% of their London counterparts.

Complaints of a general lack of SME funding have also been corroborated by figures from the Competitions & Markets Authority (CMA). The CMA’s 2014 figures show that SMEs with less than £2 million turnover represent 95% of all UK businesses, but make up only 75% of new loans on a volume basis. In this context, it's no stretch to understand why small businesses desperately need overdraft capital to stay afloat.

Bank of England figures suggest that UK SMEs lose approximately £5m a day in overdraft cuts, and it doesn’t seem that things are set to improve: in fact, Conrad Ford, Funding Options CEO, has publicly stated that “the problem of reduced overdrafts is unlikely to abate.”

Why are overdrafts being cut?

Despite being the engine room of the economy, small businesses have been badly affected by banks' adherence to tighter capital controls imposed after the 2008 banking crisis. This is probably the main driver of overdraft reductions, but there may also be a self-perpetuating element to the problem.

The Forum of Private Business has recorded a fall in overdraft usage from 25% in 2011 to 17% in 2015. This figure indicates that as overdrafts get smaller, some SMEs have already identified a need to find new financial solutions, which in turn means that banks feel less pressure to start offering larger overdrafts.

Living in the post-overdraft era

All the signs suggest that small firms will not be able to rely on overdrafts in future. Moving on from this dependence will require that bosses tackle the pervasive late payment culture that makes SME overdrafts necessary in the first place.

Ethical Enforcement Agents like Dukes Bailiffs can transform outstanding debts into working capital by recovering late payments swiftly and sensitively. If you're an SME boss who's trying to offset shrinking overdrafts, contact one of our debt advisors to find out more about our services.