Banks continue to challenge SME overdrafts

Thursday 3 September 2015

According to financial comparison site Funding Options, small to medium-sized enterprises (SMEs) have made 741 complaints to the Financial Ombudsman over the past 12 months relating to the way banks have handled their overdrafts and loans.

The top reason for these complaints is that a bank is believed to have unfairly withdrawn an agreed overdraft without warning. Funding Options claim that banks are removing overdrafts from SMEs to the value of £3.7 million per day since 2011.

However, it is possible that the true number of businesses affected by these practices is substantially higher, as only companies with fewer than ten employees and an annual turnover of less than £1.47 million can be covered by the Financial Ombudsman.

Funding Options’ chief executive officer Conrad Ford suggested that the changes were a sign that SMEs’ approaches to finance needed to adapt. He said: “The death of the business overdraft is hitting a lot of SMEs hard, as it has been a mainstay of small businesses finance for 250 years.”

“That’s one of the drivers of alternative finance becoming increasingly mainstream. We are seeing more and more SMEs exploring their alternative finance options after having their overdrafts withdrawn unexpectedly.”

“Options such as invoice financing, non-bank commercial mortgage lending, leasing, crowdfunding and peer to peer lending all provide effective funding for small businesses. There are many alternatives out there so every business should be able to find funding that works for them.”

It is now believed that SMEs in the UK are accessing £76 billion of alternative finance - a figure that is nearly half of the amount banks provide in loans and overdrafts. The amount of alternative finance available has also risen by 43 per cent over the last 12 months. This suggests that there is increasing potential to use them as an alternative to loans from the bank, particularly in the wake of the government’s decision to relax regulations around some of the alternatives, such as invoice financing.

Discussing potential solutions to the current situation, Mr Ford said: “There is still a knowledge gap among a lot of small businesses over what kind of alternative finance might be best for them. The British Business Bank’s referral scheme could bridge that gap virtually overnight if it is implemented in the right way.”

This scheme is designed to help match SMEs with the best alternative finance for their needs. Banks that decline to provide finance to SMEs are now required to refer them onto an alternative finance platform approved by the Treasury (for which Funding Options was shortlisted in July).

Of course, having choices when it comes to financing your SME is always beneficial. However, if you are unsure or confused about the many options on offer, the best thing to do is discuss the best way to proceed with your accountant, who can help you understand the differences between various products, and which one is most likely to suit your needs. You may well find a perfect way to move forward, or you may decide that a loan from the bank will work better for you.

By Victoria McDonnell

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