The business overdraft has been a contentious subject in recent years, but will the rise of alternative finance wipe this SME service from the high street?

Figures from the Bank of England and the BDRC Continental SME Finance Monitor Finance suggest that small businesses are turning away from bank overdrafts en masse. According to the former, overdraft lending to small businesses fell by £800 million in December 2013 alone, while data from the latter show that SME overdraft use dropped from 25% in Q3 2011 and 21% in Q3 2012 to just 16% in the same period in 2013.

While the drop in the use of SME bank overdrafts is grabbing the headlines, the decline shouldn’t come as a surprise given the rise of the alternative finance sector and services such as invoice finance, peer-to-peer lending and crowdfunding. Whether as a means of maintaining cashflow or generating start-up funding, these alternative finance products have proved much more accessible, as well as more flexible and transparent, than the services offered by traditional lenders.

Alternative finance services are set to play a central role in SME finance provision and, as a result, in helping turn rising business confidence into real growth – all eyes will be on the 2014 Budget to see if the Chancellor gives them further backing. While extinction may not be on the cards yet for the SME overdraft, it seems set to become a lesser-spotted SME finance service.

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