SMEs across the UK have been struggling to make ends meet for some time. Energy prices are skyrocketing, inflation is relentless and even the most modest inventory is becoming increasingly expensive to buy.

As a result, SME dependence on bank overdrafts is hovering at a 10-year high. To keep cash flow as liquid as possible, many thousands of SMEs have resorted to costly overdrafts. Perhaps in many cases they are unaware of the alternatives available to them.

True, an overdraft can be an extremely convenient setup. You can hop in and out as needed, you may qualify for a decent credit limit (if your own credit file is right) and a typical overdraft is fairly quick to arrange.

That would be great, but when you consider the potential downside of the deal, you question the overall value of bank overdrafts.

The potential pitfalls of SME overdrafts

The fact is that overdraft facilities are anything but ideal financing solutions for SMEs for their benefits. Most of these bring the following into play:

1. High interest rates: Bank overdrafts tend to carry higher interest rates than other forms of finance (some up to 10%), which can be a burden for SMEs that may already be struggling to manage their cash flow.

2. Additional Fees: Most facilities also come with a range of fees such as: B. Setup fees, overdraft fees, and renewal fees that can quickly add up and make the financing option unaffordable for small businesses.

3. limited availability: Bank overdrafts are typically only available to companies with established banking relationships, so start-ups and newer companies may not even be able to access them.

4. Unpredictable Interest Rates: The interest rate on an overdraft can fluctuate, which can make it difficult for businesses to plan and budget for their cash flow.

Putting the pieces together is a pretty big financial headache that most SMEs would do…