SME Lending Is at a Post-Pandemic High. So Why Are Businesses Using More of Their Overdrafts Than at Any Time Since 2020?

A business can be profitable, growing and creditworthy while still spending most of the year deep into its overdraft. That is often treated as normal. But if the balance never returns close to zero, the facility may no longer be absorbing a temporary cash-flow fluctuation, it may be financing a permanent gap between paying the business’s costs and collecting its invoices.

UK Finance’s latest Business Finance Review says gross lending to small and medium-sized businesses reached £5.35bn in the second quarter of 2026. That was the highest level since the pandemic and more than 26% above the same quarter in 2025.

At the same time, businesses drew more heavily on their existing overdrafts across every sector. Overall utilisation reached 51.4%, its highest level since March 2020. The figures do not mean every business is in difficulty, nor do they show that overdrafts are inherently unsuitable. They do show that liquidity is being used more intensively even as new lending increases.

The sector picture was mixed. UK Finance reports particular resilience in real estate and professional services, while lending weakened in hospitality and manufacturing. Medium-sized business loan applications fell 40% between March and April as conflict in the Middle East damaged confidence, before the data showed some improvement following ceasefire talks in June.

For an individual owner or finance director, those national trends are background. The useful question is much closer to home: what is the overdraft actually paying for, and does its structure match that need?

A £750,000 Overdraft That Never Really Clears

Consider a business turning over £10m and generating a reasonable profit. It has a £750,000 overdraft and is usually £400,000 drawn. The balance rises around payroll, VAT, stock purchases or large supplier payments and falls when major customers settle, but rarely returns to zero.

The same business may have £1.5m of trade receivables, £600,000 of plant and machinery and a £2m owner-occupied commercial property. Its customers pay on 60-day terms, while wages and suppliers must be paid much sooner.

That company may not need “more debt” in the abstract. It needs a funding structure that recognises why cash is tied up and which assets support the requirement. Increasing the overdraft could be the right answer, but it should not be the automatic one.

If the £400,000 is effectively permanent, the business is paying for flexibility it may not be using. It is also relying on a facility that can be reviewed, reduced or repriced. A different structure could provide committed headroom or link availability to the assets creating the cash gap.

Profit and Cash Are Not the Same Thing

A profitable business can run short of cash because profit is recorded when revenue is earned, not necessarily when money arrives. A recruitment firm may pay contractors weekly but collect from clients 30 or 60 days later. A manufacturer may buy materials, fund production and hold stock before invoicing the customer. A construction subcontractor can wait for certification and payment long after labour and materials have been supplied.

Growth can intensify the problem. Winning more work increases invoices and reported revenue, but it may also increase payroll, materials, VAT and stock before customers pay. The faster the business grows, the more cash can be absorbed by working capital.

This is why a highly utilised overdraft does not automatically mean the business is failing. It can mean the company is successful but its funding has not kept pace with the operating cycle. The distinction matters because a viable growth requirement should be approached differently from losses, overdue tax or a deteriorating debtor book.

Before selecting a product, establish the cause. If the business is losing money, replacing the overdraft may only move the pressure elsewhere. If the problem is timing between predictable invoices and payments, receivables-backed funding may be a more natural fit.

When an Overdraft Still Makes Sense

An overdraft is simple, familiar and flexible. The business usually pays interest only on the amount drawn and can use the facility without submitting individual invoices or assets for funding. For short-term, irregular requirements, that can be hard to improve upon.

It may work well for a seasonal company that draws for several weeks and then clears the balance after its peak trading period. It can also provide a useful emergency buffer alongside a more structured facility.

The concerns arise when the business depends on the full limit for ordinary operations, has little unused headroom or would struggle if the bank reduced the facility at review. The total cost should include arrangement or renewal charges, security and the operational risk of relying on a discretionary or frequently reviewed line.

A review is not an instruction to abandon the overdraft. The outcome may be to retain it at a smaller level for genuine fluctuations while refinancing the permanent balance elsewhere.

Invoice Finance: Linking Funding to the Debtor Book

Invoice finance can release a proportion of eligible unpaid invoices before customers settle. As the debtor ledger grows, the potential availability can also grow, subject to the provider’s advance rate, concentration limits and exclusions.

This can suit businesses that sell to other creditworthy businesses on agreed terms. Recruitment, manufacturing, distribution, professional services and some construction businesses may use it to fund wages, materials or expansion while waiting for payment.

Invoice discounting normally leaves the business in control of collections and may operate confidentially. Factoring commonly includes a credit-control and collections service. Selective or spot facilities may allow funding against particular invoices rather than the entire ledger.

The headline advance percentage is not the same as cash available. Providers may exclude overdue debts, disputed invoices, related-party sales, certain contractual arrangements or amounts above a customer-concentration limit. The facility can also include a service fee, discount charge, minimum fee and other costs.

For the example business with £1.5m of receivables, the relevant calculation is the value of eligible invoices after concentration and exclusions—not simply a percentage of the full ledger. A properly modelled facility should show the likely day-to-day availability under normal and stressed debtor positions.

Asset-Based Lending: Looking Beyond Invoices

A business with receivables, stock, plant or property may be able to use an asset-based lending structure rather than relying on one security class. ABL can combine invoice finance with facilities supported by inventory, machinery or property.

This can be relevant where the debtor ledger alone does not provide enough availability or where the business needs a larger committed package for acquisition, refinancing, turnaround or expansion. The lender will assess asset quality, valuation, control and how easily value could be realised.

Stock is not treated as cash at cost. Eligibility can depend on age, demand, location, ownership and saleability. Plant and machinery values may be based on orderly or forced-sale assumptions rather than the amount originally paid. The structure can involve monitoring, reporting and covenants that are more demanding than an overdraft.

The benefit is a facility designed around the assets already present in the business. The trade-off is additional diligence, documentation and ongoing information requirements.

Asset Refinance and Commercial Property Debt

If the business owns unencumbered or lightly financed equipment, asset refinance may release capital without linking availability to the debtor ledger. This can help fund investment, consolidate short-term borrowing or create working-capital headroom while the asset remains in use.

An owner-occupied commercial property can support a commercial mortgage or further borrowing. That may offer a longer repayment period and lower cost than unsecured or short-term facilities, depending on the property, trading performance and lender. It also places an important business asset at risk and may be too slow or inflexible for rapidly moving working-capital needs.

Property debt should not be used merely because security is available. A ten- or fifteen-year loan is a poor match for a temporary requirement that will unwind next quarter. Conversely, funding a permanent £400,000 overdraft balance against property could reduce monthly pressure but leaves the debtor cycle itself unresolved.

The correct structure may use more than one facility: property debt for a long-term capital requirement, invoice finance for the fluctuating debtor book and a smaller overdraft for unexpected shortfalls.

The Cheapest Rate Can Still Produce the Wrong Result

Businesses often compare facilities using the interest margin alone. That can hide a larger difference in available cash, fees, commitment, security and operational impact.

An invoice-finance provider offering a high advance rate may deliver less usable funding if the debtor book contains one dominant customer or many excluded invoices. A cheaper overdraft may be unattractive if the limit is too small or can be withdrawn when it is most needed. A property-backed loan can look inexpensive but impose early repayment costs or tie up security for years.

Compare the total annual cost in pounds, realistic availability, unused headroom, facility term, notice provisions, personal guarantees, debentures, property charges, covenants and reporting. Model what happens if sales rise, one major customer pays late or turnover falls.

A facility should work in the difficult month, not just on the day it is approved.

Warning Signs That the Current Structure Deserves a Review

What Accountants and Finance Directors Should Examine

A useful review starts with twelve months of bank balances, not a product brochure. Plot average and peak overdraft use, identify the transactions creating each spike and compare them with debtor days, creditor days, stock holding and seasonal sales.

The aged-debtor report should show customer concentration, overdue balances, disputes and credit notes. Management accounts should separate profitable growth from trading losses. Existing facility letters will reveal security, covenants, renewal dates and whether the bank can demand repayment.

Then establish the purpose of new funding. Financing a larger debtor book, purchasing machinery, acquiring a competitor and covering a temporary tax payment are four different requirements. They should not automatically be pushed into one enlarged overdraft.

An accountant does not need to decide the product before introducing a client. The valuable observation may simply be that a healthy business is permanently using half or more of its overdraft and should compare the structure with the assets and cash cycle visible in its accounts.

How Willow Private Finance Can Help

Willow can conduct a working-capital funding review across the business rather than beginning with one product. We examine the required amount and purpose, turnover, profitability, cash cycle, overdraft use, debtor ledger, customer concentration, stock, equipment, commercial property, existing debt and expected repayment source.

We can then compare appropriate invoice-finance, asset-backed, asset-refinance, commercial-property and conventional lending routes, including blended structures where one facility would not solve the complete requirement.

The aim is not to replace a functioning overdraft for the sake of change. It is to show whether the current facility provides enough committed headroom at a sensible total cost—and, if not, which alternatives fit the business’s actual assets and trading cycle.