Business banking – unauthorised borrowing costs rocket

According to the British Bankers Association, small firms increased their overdraft borrowing by ten per cent in 2005 to £8.8 billion. Business Moneyfacts’ Editor, Lee Tillcock, takes a look at unauthorised borrowing charges and the issue of late payment as it represents an increasingly expensive, but in many cases, an unnecessary overhead for SMEs.

“Since the 2002 Competition Commission investigation into unfair business bank charges, there has been a marked increase in many unauthorised fees, and so far little evidence of what the investigation set out to achieve, namely increased competition and reduction in day-to-day banking charges."

“There is a wide range of fees and charges associated with an unauthorised overdraft on a business current account. Charges can range from £4 to £30 per day or up to £30 per debit, a potentially costly mistake for any business to make."

“One reason likely to take an SME into its overdraft facility (authorised or unauthorised) would be as a consequence of bad debt or late payment from their debtors book. According to a recent Credit Management Research Centre report, UK firms are writing off tens of thousands of pounds every year in bad debt with SMEs writing off, on average, £14,000 per annum."

“It must also be remembered that, even if a late payment does not tip an SME over the edge, it can create an unwelcome blemish on the company’s financial history. As a credit rating becomes increasingly impaired, the opportunity to take advantage of switching to an account with an alternative provider also slips away."

“We still await an Office of Fair Trading (OFT) comment on the 2002 Competition Commission ruling. An OFT spokesman told me that it had nearly finished the consultation period on business and SME banking, and would undertake detailed analysis of the data, with a view to making an announcement on this at some point early in 2007. It seems that the question still remains the same. Can small businesses continue to survive the waiting game?"

“Following a number of successful high-profile personal cases, the OFT has stated that, in the future, charges should only reflect the administrative costs of dealing with the default. Surely the same criteria will apply to business banking. Unauthorised overdraft charges must only cover associated costs and not, for instance, be used as a method of financing other less profitable products and services."

“The best advice for any small business facing financial difficulty or cash flow problems is to speak with its business manager as soon as possible, before things get out of hand. After all, this is supposedly a service included within their banking charges.”