The UK’s Disappearing SME Bank Loan

Bank loans to small and medium-sized enterprises in the U.K. are dropping by nearly $145 million every month, according to new analysis from online marketplace lending site Funding Options.

The company, which revealed the statistic on Monday (May 23), said recent regulations pertaining to bank overdrafts have caused the steep decline in small business lending volumes.

By the end of March this year, SMEs were borrowing more than $17.5 billion in bank overdrafts, the firm said. That represents a 13 percent decline from levels recorded in Sept. 2014.

The value of total bank overdrafts lent to small businesses has dropped by 42 percent over the last five years, Funding Options added.

“Even the most successful SMEs are at risk of their overdrafts being cut with almost no notice,” said Funding Options Chief Executive Conrad Ford in a statement.

The company explained that recent regulations have forced banks to pull away from overdraft lending; according to Funding Options, the trend is unlikely to see a reversal in the near term.

Bank overdrafts are unsecured, the company explained, and do not outline repayment terms for SMEs. Banks have been forced to reduce their exposure to risk resulting from this kind of financing for their small business customers, Funding Options said.

“Demand for SME funding is still as strong as ever, but the fact is that banks have to question the logic of extending overdrafts to this section of the economy,” Ford continued. “This is not so much about small business’ ability [or] creditworthiness; this is purely a result of how banks are being forced to operate post-credit crunch.”

The executive added that banks will probably not withdraw overdrafts for small businesses that are already using them but that they are likely to continue to reduce the availability of overdrafts for SMEs going forward, meaning small businesses should identify an alternative source of capital in times of a cash crunch.

Last year, Funding Options released separate research that found SMEs in the U.K. are voicing their disapproval of withdrawn bank overdrafts at greater rates, a trend that the firm said was likely to play a role in the increase in disputes between banks and their business clients.