A business overdraft facility is arguably the most flexible business funding mechanism; a business overdraft can aid cash flow requirements brought about by a host of sources including debtors and industry seasonality. However, companies are now finding it harder to obtain a business overdraft facility.
Business overdraft facilities have been harder to keep in place, let alone source during the credit crunch and recession. Many banks are requiring that business overdrafts are converted to term loans and that the business overdraft is either removed completely, or, a new business overdraft limit is set at a nominal amount.
The change in the banks attitude towards business overdrafts has caused many companies difficulty. The flexibility of a business overdraft to deal with cash flow issues is diminished as lower borrowing limits are applied and the conversion of business overdrafts to term loans causes an additional monthly cash flow constraint. This is set against a backdrop of cost push inflation, with rising costs; companies have an immediate need for business funding and business overdraft facilities.
It does not appear that the situation affecting the availability of business overdrafts is going to change in the short term. Two of the main factors affecting the availability of business overdrafts going forward will be:
• Credit Scoring – the banks are tightening the risk profiles, making it harder to obtain a business overdraft and they are also increasing charges, making a business overdraft more expensive at a time of an historically low base rate.
• Money Supply – It has also been muted that money supply will fall in 2012, effecting the availability of not only business overdrafts but all funding facilities.
These two factors alone could potentially be enough to cripple businesses fighting to make it through the recession, if it means a reduction or loss of a much needed business overdraft facility.
There are however alternatives to a business overdraft, for the right business it may be possible to remove the requirement for third party business funding altogether. For more information, please contact us.