According to the Chief executive of banking at Close Brothers, Stephen Hodges, overdrafts leave firms vulnerable to bank whims.
SMEs are far too reliant on overdrafts and would be better off avoiding them altogether.
He says that they should be using the assets of the business to access alternative sources of finances instead.
Hodges argues that “when SMEs think about raising money they automatically think about overdrafts. But overdrafts are a lousy way for SMEs to borrow money. They may not get enough cash to buy the new vans or machine tools you need, and worst of all, their bank can pull the loan at a moment’s notice, leaving them with little or no time to find the means to pay them back.”
He believes that it is vital that business owners and entrepreneurs seriously think about other methods of finance, such as business angels, peer-to-peer lenders or putting their balances sheet to work through invoice finance and asset-based lending.
It is said that small firms did not realise how much they could borrow by using their existing assets. Hodges states that “if they talk to specialist lenders they will be surprised how much they can raise against existing assets in the business and new businesses that they are going to be generating in the future. There are always assets in a business.”
“SMEs need to unlock the value that is in their balance sheets. Plant and machinery, property, stock, accounts receivables – even future cash flows can be put up as security for a loan.”
Hodges main arguments surrounds business owners talking to experts who really understand their industry instead of asking for an overdraft from their bank.
“If you’re a small manufacturing firm in the West Midlands, it makes a lot more sense to discuss a loan with a machine tooling expert who might have worked in your field – and will take the trouble to visit your business. It is really worthwhile looking around for the lending partner who really understands your industry.”