While many businesses prefer a bank overdraft there are many disadvantages.
- Many think it is set and forget, however if the business is growing it may have to be rearranged regularly, incurring new set up fees. Perhaps during the term of the facility.
- It is “at call” and they can be called in by the lender at any time.
- You face administration fees if you exceed the agreed limit.
- Overdrafts are normally secured against business assets – the lender can take control of these if you don’t repay the overdraft.
- You can only get an overdraft from the bank where you maintain your current account. In order to get an overdraft elsewhere you need to transfer your business bank account.
- The interest rate applied is nearly always variable, making it difficult to accurately calculate your borrowing costs.
Banks typically set and limit business overdraft levels based on a company’s trading history, without recognising the true value of a company’s liquid assets, e.g. debtors. This means that an overdraft is a backward looking, rigid way of financing growth, with the worrying disadvantage that it could be withdrawn at anytime, especially in today’s business climate. In direct contrast, an alternative business funding option is revolving debtor finance such as an invoice discounting facility that grows with a company’s sales day by day and is only constrained by the level of invoiced business transactions.
So is your bank overdraft restricting your company growth? An invoice finance solution that moves forward with your business could be the answer.
Debtor finance acknowledges what is for many ‘small medium enterprises’ their primary asset, i.e. the outstanding value of any trade sales offered on credit terms. When a company grows, therefore the value of any outstanding invoices increase, then a flexible cash flow solution such as invoice discounting automatically expands with those debts thereby filling any potential funding gap for supplies, raw materials etc.
Invoice finance is therefore an asset based facility, which can accommodate business expansion, typically giving fast access to cash up to 80% of your outstanding trade debts. Cash raised in this way can be used to reduce or complement an overdraft facility, but more importantly maintain cash flow or working capital and give the company the opportunity to achieve supplier discounts through early payment.