Banks are cutting small business overdrafts much more sharply than traditional bank loans, creating a ‘hidden credit crunch’ for small businesses.
In the two years to the end of March 2014, the value of overdrafts drawn by small businesses fell by 23%, from £18.2 billion to £14.1 billion. Over the same period traditional bank loans to SMEs fell by just 9%, from £187 billion to £170 billion.
Banks’ ability to provide credit to small businesses is still constrained by regulators’ capital holding requirements. Cutting overdraft facilities is an easy target for banks looking to reduce their small business lending books, as overdrafts can be withdrawn almost immediately.
The withdrawal of overdrafts could also be particularly problematic for those small businesses who have previously relied on their overdraft to cover the cost of short term funding requirements such as Corporation Tax, VAT and equipment purchases.
Peter Alderson, Managing Director of White Oak UK, says:
“A lot of attention is paid to the amount of term lending banks provide to small businesses, 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“If their overdraft facility is withdrawn or slashed, a lot of small businesses could find that covering the cost of essential business expenditures, such as Corporation Tax or VAT bills, is a real struggle.”
Overdraft withdrawal threatens law and accountancy firms as July 31 deadline nears
Even law and accountancy firms, which banks viewed as ‘good credits’ prior to the credit crunch, are seeing their access to lending diminish.
This could be particularly problematic for them as they approach one of the major pinch points of the financial year, the July 31 deadline for self-assessment tax payments.
Peter Alderson adds:
“Many of professions partnerships used to manage the considerable peaks and troughs of their financial calendar by using their overdrafts to pay their partnership tax and VAT bills. For a lot of them, that simply isn’t an option anymore.
“VAT can be a particularly tough hurdle for some, since it is normally billed on invoiced work rather than actual income. That means the tax bill for a big piece of work can come before the client has paid for it, stretching cashflow to, or even beyond, its limit.
“The Q2 VAT bill is a particular headache for professions firms as it comes hard on the heels of a partnership tax bill. Add that to the late payment problems that many of them have faced since the credit crunch, and it’s clear why having access to short term business loans for tax is absolutely crucial.
“Small businesses need to be aware that other forms of finance are available, and that specialist finance providers can step in to provide business finance where the banks no longer can.”