SMEs remain under pressure as banks continue to shift overdraft lending away from them in favour of large businesses.
There has been a 37% fall in the value of overdrafts provided to SMEs over the last five years from £19 billion to £12 billion* (see graph), whilst overdrafts given to large businesses have increased by 25% over the same period from £19 billion to £24 billion.
The shift in favour of large businesses is due changes in capital requirements which favour lending to big businesses over lending to SMEs.
This withdrawal of overdrafts is particularly damaging to SMEs with irregular income, such as those in the tourism, hospitality or retail sectors. Without overdrafts, the cash flow of these businesses can be put under strain when trading slows.
Crucial trading period
SMEs, especially those within the retail and leisure sectors, can find the lead up to Christmas very challenging if they do not have access to overdrafts. This is because firms increase spending in order to stock up ahead of the crucial Christmas trading period but customers often delay invoice payments until the New Year.
Furthermore, salaries tend to be brought forward so staff can be paid before Christmas and overdrafts are often used to cover this cost.
Funding Options believes that businesses are increasingly turning towards alternative finance in order to meet their short-term cash requirements that used to be provided by overdrafts. This includes invoice finance, asset finance, crowdfunding and peer-to-peer lending which can all help provide businesses with liquidity.
To help businesses find alternative finance, the Government has introduced the ‘Bank Referral Scheme’ which is aimed at making it easier for SMEs to obtain funding. As part of this scheme, banks will offer any small business whose loan application they have rejected a referral to one of three designated finance platforms, including Funding Options.
SMEs face growing pressure and difficult choices as the value of overdrafts available to them continues to fall.
As banks concentrate on providing overdrafts to large businesses, SMEs have had to look elsewhere to support their short-term funding needs.
SMEs with irregular cash flows rely heavily on overdrafts, especially those businesses in the tourism, hospitality and retail sectors which are more seasonal in nature.
There is a growing gap between what SMEs need and what banks can provide. The new bank referral scheme will help bridge that gap and we are very excited to be part of it.
The referral scheme will leverage the UK’s position as a global leader in FinTech to make sure that SMEs are better able to use the diverse range of funding options available to them.
SMEs are under pressure as the value of overdrafts provided by banks continues to fall – overdrafts provided to SMEs
Small and Medium Sized Enterprises (SMEs) are defined as those businesses with a turnover of less than €50 million and large businesses as those which have a turnover greater than €50 million (£44.7 million).
*Data to 30/09/2016
Conrad Ford is CEO of Funding Options