When Steve Davies asked his bank if he could extend his overdraft by £3,000
for a couple of weeks to cover the quiet winter season at his guest house,
it not only refused, it promptly increased the rate it was charging for his
existing overdraft - and then withdrew the entire facility.
Davies is not alone. There is growing evidence that banks are hurting small
businesses by cutting back their overdraft limits and increasing charges on
them, despite publicly claiming to support such firms.
In many cases the moves by the banks to cut facilities and raise rates have
been completely unexpected and often bear no relation to the state of the
business itself.
Stephen Alambritis of the Federation of Small Businesses (FSB) said: “The
banks are still not reacting in the way they should be. A lot of small firms
rely on their overdrafts to get them through from week to week. Overdrafts
are flexible and should be on tap for small businesses, especially during
the difficult times when they are getting paid late, and bank managers
should be aware of this. For a small firm to have its overdraft withdrawn is
the first step on the way to insolvency.”
In a recent survey of 4,000 members, the FSB found that in the past two months
28% of firms had seen a increase in the cost of their existing finance such
as overdrafts or loans.
The Forum of Private Business (FPB) has also found that its members are
getting a raw deal on overdrafts. The FPB’s Phil McCabe said: “Both the cost
and the availability of overdraft facilities are becoming more restrictive.
We are hearing of cases where business owners have gone to see their bank
managers to renegotiate their overdrafts and have had them withdrawn
altogether. And these are apparently viable concerns.
“One in three of our members says that the situation regarding overdrafts is
deteriorating. The problem is that overdrafts are used by small-business
owners for survival and everyday cash-flow purposes. Having restrictions on
loan lending that is used for investment is bad enough, but when you have
your overdraft removed it is like someone switching off your life support.”
For Davies and his wife, Lisa, who own the Caddon View guest house at
Innerleithen in the Scottish Borders, the decision by Clydesdale Bank to
remove their overdraft strikes them as particularly bizarre as their
business, which has a turnover of £90,000, is actually growing strongly.
Davies said: “In January our sales were 100% up year on year. We had a
fantastic Valentine’s weekend and our forward bookings are up 40% on where
we were last year.”
Instead of supporting them, however, Clydesdale increased the charge for his
£3,000 overdraft from £150 for three months to £300 for one month. And when
Davies told Clydesdale he had been forced to borrow money from his family
because of the bank’s refusal to extend his overdraft, the manager told him
he clearly did not need any overdraft and withdrew it.
Davies said: “We have been treated in an extremely cavalier and shoddy
fashion. The credit people at the bank are making blanket assumptions that
all businesses in the hospitality sector are struggling, which is stupid and
naive.”
Another successful firm that has been penalised by its bank is Chuanglee, a
large wholesale distributor of Thai food based in southwest London that
supplies more than 100 restaurants.
Until recently the firm had a £700,000 invoice-factoring facility with Royal
Bank of Scotland (RBS) that worked well, but the bank repeatedly chipped
away at the percentage offered against each invoice until the firm felt it
was not worth continuing with the arrangement.
Michael Paterson, chairman of Chuanglee, said: “I am aggrieved that, despite
our good record, the bank has been changing the goal-posts. The conditions
it has put on the discounting have been made tighter and tighter as the
economic downturn progressed. This has put a lot of pressure on us.”
As a result the firm decided to switch to a straight £500,000 combined loan
and overdraft facility with NatWest, which has, however, required that all
the directors of the firm put up their houses as security.
William Flatau, who runs the commercial-finance brokerage First Finance, said:
“It’s no secret that the banks are desperate to retain what cash they can.
This means pulling back resources and, unfortunately, small businesses are
in the firing line. So we are seeing overdraft facilities reduced, we are
seeing commercial mortgages pared back, and trade facilities like factoring
being slashed for no good reason, largely because small firms are easy to
bully.
“It’s making life very tight for small businesses in a nasty recession. These
firms are the lifeblood of the economy and they can’t do business because
they can’t get their hands on borrowings for day-to-day operations.”
RBS and NatWest have said they will maintain existing overdraft agreements for
small-business customers with a turnover of less than £1m, provided the
terms and conditions are not breached.
