More than half (55%) of small businesses in the north have seen their overdrafts reduced or withdrawn completely in the last two years, compared to just a quarter of London SMEs.
The research suggests that northern businesses are growing more slowly than the London economy despite a government push to build a “northern powerhouse”.
SME bank overdrafts have been cut by £8.4bn since 2011. That equates to £5m every single day.
However, this £5m a day has not been cut uniformly across the UK, according to Funding Options. The government’s northern powerhouse has suffered the most from the banks’ retreat from provision of working capital finance to small businesses.
Economic growth in the north west is currently 2.6% per year and just 2.4% in the north east compared to 3.3% in London, according to recent high street bank statistics.
Conrad Ford, chief executive of Funding Options, said, “Reductions in small business overdrafts are cutting off the fuel for the northern powerhouse.” Sharp reductions in working capital through overdraft cuts are the “hidden credit crunch” affecting Britain’s small businesses, he added.
“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.”
Funding Options added 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 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 platforms. The scheme is expected to launch early next year.Sinead Moore