Small business funding

Banks are cutting small business overdrafts much more sharply than traditional bank loans, creating a ‘hidden credit crunch’ for SMEs and potential cashflow problems for accountancy firms, according to research by finance provider LDF report Harris & Co accountants Northampton, the specialist small business accountants.

LDF says its analysis shows that in the two years to the end of March 2014, the value of overdrafts drawn by small businesses fell by 23%, from £18.2bn to £14.1bn. Over the same period traditional bank loans to SMEs fell by 9%, down from £187bn to £170bn.

The research also suggests that accountancy firms, previously viewed by banks as ‘good credits’ prior to the financial crisis, are seeing a reduction in lending levels. Alderson warned this could be a problem ahead of the 31 July deadline for self-assessment tax payments.

Peter Alderson, LDF managing director said:

‘Many of profession’s 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.’

‘The Q2 VAT bill is a particular headache for 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 funding for tax is absolutely crucial.’

LDF also highlighted that the banks often withdraw overdraft facilities at short notice, increasing pressure on SMEs.

He continued:

‘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‘If their overdraft facility is withdrawn or slashed, a lot of SMEs could find that covering the cost of essential business expenditures, including corporation tax or VAT bills, is a real struggle.’