SMEs Prefer Overdrafts to Loans
More small-business owners are using bank overdrafts rather than loans to finance their firms during the recession, according to credit reference agency Creditpal.
A Creditpal survey of 540 small businesses found that 30% had applied for an overdraft or overdraft extension during the past two years, while just 21% had applied for a bank loan, despite business loans being a much cheaper form of debt finance.
“Many small firms have chosen to stick with their current bank for overdraft facilities, rather than try to approach a new lender for a loan,”
said Creditpal chief executive, Chris Poll.
“Overdrafts are obviously a fast and effective means of extending finance and businesses shouldn’t avoid them automatically if they are suitable for their needs. But the rates of interest they face paying are likely to be far higher than for a business loan.”
However, independent financial adviser Yvonne Goodwin Wealth Management’s managing director, Yvonne Goodwin, said interest rates are so low at the moment it may not actually cost much more to have an overdraft.
“Applying for an overdraft rather than a loan could also save small firms from paying interest rates over a longer period,” she said. “If you’re expecting cash to come in, or have a big job coming up which will solve any cashflow issues, there’s no point paying interest on a loan. A temporary overdraft could be more flexible for your business and work out to be cheaper.”
For further information read the business advice on loans & overdrafts.