In the last three years, overdrafts as a percentage of all forms of finance used by SMEs dropped from 25pc in 2011 to 16pc last year.
A study from alternative lender, Platform Black, found that 56pc of those surveyed had relied on a bank overdraft facility in the past two years, and 1 in 5 have seen their bank cut back or suggest a restriction on their overdraft facility.
"The day of the unsecured overdraft provided by banks is dead and, in the rare instances that the SME is offered an overdraft, it comes with a scorpion sting in the tail in the form of the bank having a debenture over their business,” said Louise Beaumont, co-founder of Platform Black.
New Bank of England statistics also show overdraft lending to this sector fell by over £800m alone in December 2013, representing over 70pc in the fall of total lending to SMEs.
"Traditionally overdrafts have been easy to arrange, flexible and cost effective as a way to access working capital. However, these days are now long gone and, despite the economy in the UK starting to show signs of growth, the majority of banks are withdrawing these vital overdraft facilities from SMEs," she said.
Pulling overdraft accounts can be done at very short notice, without discussion and leaves businesses under extreme financial pressure - some teetering on the edge of bankruptcy, she explained.
"This isn’t good for the business or indeed for Britain as we try to claw our way out of the economic downturn," she added.
Of the 1,300 business owners polled, the majority have turned to shadow banking - 40pc use a credit card, 8pc have sought bank loans, 48pc use invoice financing and 24pc have turned to leasing or hire purchase.
Chris Lever, owner of Bindatex, turned to invoice finance to fund the purchase of a specialised machine but was unsure where to turn for finance.
The company carries out precision slitting for carbon fibre tapes for the composites industry.
“Cashflow was becoming an increasing challenge for us as we wanted to continue to finance our growth," said Mr Lever. "The Bank had granted us an overdraft to finance our business but this was secured on the assets of the business and offered us minimal flexibility to enable us to continue on our growth trajectory."
