Banks are withdrawing overdrafts worth millions of pounds a day from small businesses, new research has found.
Online business finance supermarket Funding Options said small businesses made 741 complaints to the Financial Ombudsman Service over bank loans and overdrafts last year.
One of the most common reasons small businesses complain to the ombudsman, it claimed, is the withdrawal of overdrafts by banks without any warning.
Funding Options said its research shows that small business overdrafts have been withdrawn by banks at the rate of £3.7m per day since 2011.
Funding Options said these complaints are “only the tip of the iceberg” as only the smallest businesses can complain to the ombudsman. Businesses with ten or more employees, or with a turnover of more than €2m, are not able to make complaints.
This, Funding Options, said “could indicate the amount of disputes between businesses and banks is much greater”.
Funding Options said that this withdrawal of funding has led to many small businesses looking to alternative finance.
It believed that £76bn of alternative financing is in use by SMEs, now almost half of the amount of bank lending currently used by small businesses. In the last year alone there has been a 43 per cent increase in SME alternative finance lending.
Conrad Ford, chief executive of Funding Options, said: “The death of the business overdraft is hitting a lot of SMEs hard, as it has been a mainstay of small businesses finance for 250 years.
That’s one of the drivers of alternative finance becoming increasingly mainstream. We are seeing more and more SMEs exploring their alternative finance options after having their overdrafts withdrawn unexpectedly. Options such as invoice financing, non-bank commercial mortgage lending, leasing, crowdfunding and peer-to-peer lending all provide effective funding for small businesses. There are many alternatives out there so every business should be able to find funding that works for them.”
Ford said that the British Business Bank’s alternative finance referral scheme, for which its platform was shortlisted in July, will play a critical role in raising awareness of the alternative finance choices available for small businesses.
He added: “There is still a knowledge gap among a lot of small businesses over what kind of alternative finance might be best for them. The British Business Bank’s referral scheme could bridge that gap virtually overnight if it is implemented in the right way.”
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