Charges worry as small firms turn to overdrafts

Nearly one in three SMEs (30 per cent) have applied for a new bank overdraft or an extension in the last two years, according to CreditPal, even though it can cost more than a business loan.

Only one-in-five (21 per cent) of SMEs have made an application for business loans in the last two years.

Firms with a turnover between 250,000 and 500,000 are the most likely to look to an overdraft facility, rather than a loan, for finance. Just under half (49 per cent) have done so in the last two years, while fewer than a third of companies said they had made an application for a bank loan in the same period.

Chris Poll, chief executive of CreditPal, said: "Business operators may feel an affinity with their current account provider, so seeking an overdraft extension rather than a loan from another provider may seem a more appealing option.

"The rates of interest they face paying, however, are likely to be far higher than for a business loan.

"Though there's been much publicity over the banks' reluctance to lend it is now clear there is money available for sound businesses."

The total value of SME overdrafts was 9.06bn in September last year, according to the most recently published figures from the British Bankers' Association, marginally from six months previously. The CreditPal survey data was based on a YouGov survey 540 SMEs.