By Claire West

The value of outstanding small business bank overdrafts has fallen by 16% in the past year as banks have reduced their SME lending, says Syscap.

Syscap says that the value of outstanding bank overdrafts drawn by UK small businesses totalled £15.4 billion at the end of June 2013, down sharply from £18.4 billion in June 2012, and £20.3 billion in June 2011*.

Syscap also comments that while banks have begun to tentatively increase their small business loan books in recent weeks, these small increases are dwarfed by the value of shorter term overdrafts withdrawn by banks over the last year.

Philip White, CEO of Syscap, says: “Overdrafts have traditionally been a basic building block for small businesses, allowing them some breathing space in their cashflow. These statistics show that UK SMEs are now having to look elsewhere for short-term credit facilities.”

“Banks are being forced to hold more capital against the loans they write, and that capital has to come from somewhere. Small business overdrafts are an easy target for banks, as they can be withdrawn with little or no notice.”

On August 27, Nationwide confirmed that it was having to delay its planned expansion into SME lending.

In addition to reducing the value of overdrafts being used by small businesses, banks have also been decreasing SMEs’ agreed overdraft facilities — the short-term credit lines available to businesses if needed.

Says Philip White: “We have frequently heard from our customers in recent months that their banks are lowering agreed overdraft limits, and creating situations where costs like VAT bills can create an unnecessary cashflow crisis.”

“This shows how crucial it can be for businesses to explore alternative forms of funding, that can provide the flexibility they need. If businesses find that their overdrafts disappear just when they need them most, it can unnecessarily threaten the viability of otherwise healthy businesses.”

Syscap says that asset finance can be a more secure form of lending for businesses making capital investments.

Philip White explains: “An overdraft can be withdrawn by a bank at any time, meaning that any capital investment programme that relies upon one doesn’t have a solid foundation.”

“Asset finance, on the other hand, remains in place so long as the business is able to keep up repayments on it. As the economy begins to recover and more businesses look to invest in growth, it’s important that they look beyond banks for the lending they need.”