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Nearly a third of overdrafts held by small and medium-sized enterprises (SMEs) in the UK have been reduced or removed altogether over the past two years, according to research from Funding Options.

Funding Options said the ongoing decline of business overdrafts is likely to continue, and become permanent. It comes as tighter rules on banks’ capital controls since the credit crunch mean that small business overdrafts are unlikely to ever rebound to pre-crisis levels.

Conrad Ford, CEO of Funding Options said: “We are witnessing the end of the business overdraft as a reliable source of funding for small businesses and for SMEs this is a painful process.

“The withdrawal of overdraft facilities is a significant problem for SMEs. A big reduction in the level of working capital available is not just a one-off blow for a small business but presents ongoing problems until replacement funding is found or built up."

“Small business owners are increasingly using alternative forms of finance – but there is still a knowledge gap about the options available. Many businesses don’t know there are cost effective alternatives to overdrafts and give up once their bank has turned them down. The new small business lending referral scheme should prove a vital link in informing SME owners about different forms of financing."