By Daniel Hunter

Almost three quarters (71%) of small and medium sized enterprises (SMEs) have seen their overdraft limits reduced by their finance providers. Yet, almost half (48%) state that they rely heavily on this resource to keep their business afloat, according to a new study by ABN AMRO Commercial Finance.

This report comes on the back of yesterday's news that revealed banks are reducing their lending to business, despite the British Bankers' Association (BBA) claiming this was down to a lack of demand from businesses.

“It’s deeply concerning that SMEs are operating in such a changeable finance environment. Financial stability is one of the most important precursors to growth, so SMEs’ over-reliance on overdrafts could be putting them, and broader economic recovery, at risk," Peter Ewen, Managing Director of ABN AMRO Commercial Finance, commented.

Despite the danger of facilities being reduced, overdrafts continue to provide a vital backstop for a large number of businesses. The majority of UK SMEs (89%) say they would survive for less than 3 months without their overdraft.

Four fifths (82%) of SMEs say they rely on their overdraft to cover unexpected costs. More than two thirds of businesses (67%) depend on them to cover ‘cash flow gaps’ which 61% identify as a serious threat to their business.

SMEs’ demand for finance is also pushing the boundaries of their overdraft facilities, with an overwhelming majority (92%) admitting to breaching their agreed overdraft limit at least twice a year. On average, they admit to having spent 20% of the past year in excess of their limit.

“SMEs are clearly relying more and more on their overdrafts as a cash flow stopgap during tough times. But this practice could become dangerous if banks are unable to ensure funding is consistent,” says Ewen.

In addition to funding reduction, businesses also noted significant fee and condition changes over the last 12 months.

The majority of SMEs (86%) saw their overdraft fees rise, while an even larger proportion of firms (89%) said that their terms and conditions had been altered.

As a result of this, more than a quarter (26%) of businesses do not feel in control of their finances.

“Current economic conditions and the upcoming enforcement of Basel III are no doubt putting increasing pressure on traditional finance providers," Ewen added.

"This is understandable but uncertainty around funding is clearly worrying business owners as they struggle to stay in control of their finances. SMEs don’t need moving goalposts at a time like this.

“In this difficult financial climate, those businesses looking beyond mere survival to growth and long-term success should seek out more reliable finance, giving them a stable foundation and the confidence to grow.”

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