The number of complaints to the Financial Ombudsman Service from small businesses about loans and overdrafts has jumped 10 per cent in the last year, research finds.

The number of complaints to the Financial Ombudsman Service (FOS) from small businesses about loans and overdrafts has jumped 10 per cent in the last year, research finds.

A study by independent finance provider Syscap reveals that the figure rose from 394 to 435.

The company says that as only the very smallest businesses are allowed to lodge complaints with the FOS about banks, the real scale of disputes between businesses and banks over loans is likely to be many times greater.

Disputes cover issues such as banks refusing to renew loan or overdraft facilities to a business or doing so only at a dramatically increased margin or with large additional charges.

Philip White, CEO of Syscap says, ‘It is disappointing that so far into the credit crunch the number of disputes continue to increase.

‘Whilst some lenders are treating small businesses very responsibly, there have been too many incidences of banks using the shortage of credit as an excuse to impose the highest possible fees that they can get away with on their customers.’

White says that too many of the businesses that banks refuse to fund at an economic rate are viable, successful businesses.

He adds that one reason why disputes between banks and small business customers continue to flare up is because some banks are encouraging their customers to borrow through bank overdrafts rather than through longer term asset finance products like leases.

‘An overdraft is a very unsecure way for a business to fund its expansion. A bank can pull an overdraft at almost no notice causing a crisis for the business and that is a recipe for disaster and major disputes.

‘If a business is acquiring a long term asset like IT or machinery then they should use leases to fund that investment. Lease funding cannot be withdrawn at the whim of the lender and it doesn’t weaken the balance sheet of the borrower.’

Last year one of the major high street banks stopped offering small businesses asset finance, instead asking them to fund their business investments with overdrafts or term loans.

Adds White, ‘Some banks like to avoid long term lending to small businesses as it frees up capital that they might prefer to deploy in other areas.’

See also: Small businesses urged to tighten up staff complaints process