Members of the UK200Group comment on news that overdrafts for SMEs are being withdrawn

Members of the UK200Group of independent accountancy and law firms have commented on news that overdrafts for small firms are being withdrawn or cut at an increasing rate by major lenders. According to claims by business finance supermarket Funding Options, around 17% of the UK’s SMEs have reported their overdrafts being removed, and a total of 30% have seen reductions imposed over the past two years. Meanwhile, separate data from the Bank of England shows that £5m of SME overdrafts have been cut every day since 2011 as banks seek to reduce risk.

Duncan Montgomery, tax partner at UK200Group member firm Whittingham Riddell, said:

“Reducing an overdraft that is unused is often done to allow the bank to redeploy funds elsewhere in a more profitable way. An overdraft agreed facility has to be taken account of by the bank in its calculations of funding, so to have unused overdraft out there is not a good thing for them. Moving on to structured loans is often preferred, and the banks do like invoice financing but that suits certain businesses much more than others. When assessing overdraft needs, besides cash peaks and troughs, it is also wise to look at the debt to equity ratios for the business and other KPIs. If stock turn is low for example, there will be value to be realised there that should free up cash. A proper set of KPIs can work wonders.”

Jonathan Russell, partner at UK200Group member firm ReesRussell, said:

“Many small businesses are seeing their overdrafts removed but it is not as draconian as the headline might appear. The banks now are looking much more towards affordability and more importantly repayment. As a result, businesses which have hard-core overdrafts are being forced towards repayment loans. This is not the end of overdraft facilities but the banks are increasingly insisting that the account is ‘fully fluctuating’. In other words, over a period of three months or so they would expect businesses to spend some of the time in credit and some of the time towards the top of their facility. The other push by banks is away from overdrafts to facilities such as invoice finance. Much of this has to do with banks looking to improve the quality of their security with small businesses but also to show responsible lending by having repayment programmes.”