A surprising proportion of businesses bank overdrafts are due for their annual review in the early part of the Calendar year. The reason is that many were put in place originally to help with seasonal pressures and then become formalised in the New Year and then renewed annually.
Traditionally most businesses will have waited for the call or letter from their bank to advise them the review is due and asking for information or even a meeting. In most cases the facility was renewed without much effort and after payment of a fee.
Business owners should no longer take this for granted or leave this important event (which it is if the overdraft is relied upon) solely in the hands of the bank. Times have changed, for the following reasons:
- Compliance imposed upon the banks has made the setting up and renewal of even the simplest overdraft a time-consuming task. Time equals cost and the fee that the bank charges will not cover the true costs.
- It is often a ‘tick-box’ job requiring a lot of detailed information to be fed to underwriters or into a credit system. Not the favourite part of a banker’s day!
- Regulatory requirements for capital provision mean that banks have to set aside funds to cover overdraft provision. Yet the facility is often not used fully so this becomes disproportionately expensive for the bank – and SME’s are not yet ready for ‘non-utilisation fees’ that many corporates would expect to see.
- Overdrafts are actually a risky form of lending for banks – they have little control over how they are used and by the time a problem is evident the only action the bank can take is to cap, contain or withdraw the facility.
- Other forms of lending are less risky and far more remunerative for the bank – and probably easier to put in place. This is one reason for banks to encourage the use of the Invoice Discounting facilities or to use a loan to inject cash.
Businesses with overdrafts should ask themselves the following questions:
- When is the facility due for review – so when do they need to plan to ‘take the initiative’?
- Do they need it?
- If so, what do they have to do, say three months ahead, to create the strongest case for its extension?
- Do they want to be in control of this or do they just want to leave it to the bank?
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