Death of the SME Overdraft - a survey by Platform Black
Overdrafts have long been the lifeblood of small and medium sized enterprises (SMEs) with almost half of all traditional bank finance products used by SMEs being overdrafts. Traditionally they have been easy to arrange, flexible and cost effective as a way to access working capital. However, these days are now long gone and, despite the economy in the UK starting to show signs of growth, the majority of banks are withdrawing these vital overdraft facilities from SMEs.
The most recent Bank of England (BoE) statistics show that SME overdraft lending fell by over £800m in December 2013 alone. Withdrawing overdraft facilities can be done at very short notice, without discussion and leaves businesses under extreme financial pressure - some teetering on the edge of bankruptcy. This isn’t good for the business or indeed for Britain as we try to claw our way out of the economic downturn. But a growing number of businesses have spotted the risk and are looking for alternative solutions so that they won’t be impacted as and when their bank pulls their overdraft facility. Invoice Trading is seeing huge growth as there are no lock-ins and firms can access finance as and when they need it, at a price that they determine – or less.
Over the last three years the percentage of SMEs using overdrafts in Q3 of each year has fallen from 25% in 2011, to 21% in 2012 to 16% in 2013, and the most recent BoE statistics also show that overdraft lending to SMEs had fallen by over £800m in the month of December alone, representing over 70% in the fall of total lending to SMEs, the biggest monthly fall for over three years.
Platform Black, one of the UK’s leading invoice trading firms, has surveyed over 1,300 SMEs and revealed the following results:
· 56% of those surveyed have relied on a bank overdraft facility in the past two years and 32% of them in the last 6 months
· 1 in 5 (20%) of the SMEs surveyed have seen their bank cut back or suggest a restriction on their overdraft facility
· When asked about other methods of financing their business, 40% use a credit card, 8% use a bank loan, 48% use invoice financing and 24% turn to leasing or hire purchase, clearly showing the need for alternative financing
Chris Lever, owner of Bindatex, that carries out precision slitting for carbon fibre tapes for the composites industry, said: “Cashflow was becoming an increasing challenge for us as we wanted to continue to finance our growth. The Bank had granted us an overdraft to finance our business but this was secured on the assets of the business and offered us minimal flexibility to enable us to continue on our growth trajectory. We had recently created three more jobs and wanted to buy a specialized machine and were unsure where to turn for finance.
Thankfully, we discovered Platform Black and their Invoice Trading platform which allowed us to put up our invoices for auction and receive cash when we needed it on our terms. We’ve been pleased to discover that the finance costs are also typically lower than we anticipated, 0.6% or 0.7%, rather than 1.5% to 2% and this has enabled us to continue our growth.”
Louise Beaumont, co-founder of Platform Black, adds: “The BoE monthly statistics reveal some terrifying trends for the UK’s SMEs. Lending has fallen by over £1.1 billion for the month of December, showing just how desperate the plight of small businesses in the UK really is. Also, overdrafts, which are the life-blood of small businesses, fell by over £800 million in December alone. These awful statistics are compounded by the main high street banks cutting their SME specialists - one of the UK’s main high street banks recently announced that it is cutting almost a quarter (600) of its specialists who advise smaller companies, as it pulls back from supporting the SME market. Indeed, I recently spoke to a business owner who said that he has had six business account managers in three years and has only met two of them.”
“The most worrying trend is the withdrawal of overdraft facilities; there are hoards of SMEs coming to us desperate for finance because their overdraft facilities have been repeatedly chiseled away. Overdrafts have been popular as they used to be unsecured and provided flexibility such as easy access to finance without chaining the small business owner to a debenture. But the day of the unsecured overdraft provided by banks is dead and, in the rare instances that the SME is offered an overdraft, it comes with a scorpion sting in the tail in the form of the bank having a debenture over their business.”