Northern SMEs twice as likely to lose bank overdrafts than London counterparts

Research by Funding Options suggests a North/South divide in the way SMEs are treated by commercial banks.

More than half (55%) of Northern SMEs have seen their bank overdrafts withdrawn or reduced in the past two years, according to a report commissioned by Funding Options.

Across the same period only 25% of London SMEs have suffered the same fate. The report suggests that this may be down to a “lingering North/South divide” in business banking.

As a result Funding Options says that the £5m per day cut from SME overdrafts constitutes a “hidden credit crunch” – with the North disproportionately affected. Economic growth in the North-West (2.6%) and the North-East (2.4%) is lagging behind that of the capital (3.3%).

It adds that the withdrawal of overdrafts is one of the biggest drivers of the increasing use of alternative finance, such as invoice finance, asset finance, bridging loans and peer-to-peer lending.

This is only likely to increase with the launch of the government’s alternative finance referral scheme, under which banks will refer SMEs they turn down for funding to alternative finance platforms. The scheme is expected to launch in early 2016.

“Reductions in small business overdrafts are cutting off the fuel for the Northern Powerhouse,” said Funding Options CEO Conrad Ford.

“The ongoing reductions in overdrafts for small businesses is the hidden credit crunch, and while the whole country has been affected, the North has been hit a lot harder than London.

“As the banks have been forced to reduce their exposure to small business lending, they have focused on overdrafts as a risk that can be eliminated with relative ease, and at short notice. We’re now approaching the end of the business overdraft as a tool for working capital.”

Further reading: SMEs warned against panic buying ahead of AIA changes

Praseeda Nair

Praseeda Nair

Praseeda was Editor for GrowthBusiness.co.uk from 2016 to 2018.

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