Tuesday, 29 July 2014 14:18

Business overdrafts - the hidden credit crunch

Business overdrafts have been called the 'hidden credit crunch' following the news that while traditional bank business loans have fallen 9% in the past two years, the banks have called in 23% of overdrafts in the same period.

The figures come from a report by finance providers LDF, who say traditional bank business loans fell from £187 billion to £170 billion in the two years to March 2014, while overdrafts fell from £18.2 billion to £14.1 billion.

Clearly loans account for the larger amount of funding - roughly ten times as much as overdrafts, in fact - but it's fair to say that business overdrafts are the most immediate form of bank lending for companies that encounter temporary and unexpected cash flow problems.

For example, even a single large overdue invoice could be enough to see a business go overdrawn, if there is not a large amount of working capital typically held in the primary bank account; an overdraft is a direct buffer for this, preventing the need to go through a formal business loan application, to take out a bridging loan, or to face the fees of invoice financing.

Peter Alderson, managing director of LDF, said:

"A lot of attention is paid to the amount of term lending banks provide to SMEs, but the withdrawal of overdrafts is the hidden credit crunch for small businesses.

"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 cash flow."

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Keeping Cash Flow in the Black

We would always argue that the preferable alternative to any kind of bank lending - whether it is a prearranged overdraft, ad hoc access to invoice finance, or a formal business loan - is simply to keep your cash flow in the black wherever possible.

Decreasing your reliance on credit helps to insulate you against the shock of having your loans called in by your bank or other lending provider, and it also means that you have the option of credit to fall back on if something else happens that means you really do need it.

The obvious way to do this is by preventing late payment, and you can do this by adopting professional and consistent invoicing procedures; but in some instances, no matter what you do, clients will pay late, and it is here that your actions can determine how well you protect your cash flow.

Prompt reminders can recoup payment from those clients who have genuinely simply forgotten about their deadline, or who typically only pay their bills once a month and have not yet reached that date since receiving your invoice.

And for those who still do not pay, swift professional debt recovery services are your ally, allowing you to pursue in the appropriate way for settlement of accounts that remain outstanding beyond the agreed 30 days (or whatever alternative payment terms you may have agreed).

It is rightfully your money, and pursuing for payment is the professional thing to do - and the more of your income you receive within or close to 30-day terms, the likelier you are to have funds in the bank to cope with any unavoidable disturbances to your cash flow.

If you need help with any aspect of credit control or debt recovery then contact us for free no nonsense support and advice.

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