An Invoice Finance and Overdrafts Comparison

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    During the time when the United Kingdom underwent a recession, smaller businesses were not able to access bank loans. This meant therefore that a large number of business owners who found themselves in need of a financial boost for their businesses had to turn to alternative means of raising the necessary funds. This period gave rise to an increased use of invoice finance as the method became more and more acceptable. Its popularity in fact, surpasses that of business loans and overdrafts today.

    If any business is in need of financing, the best option is invoice financing as it offers a number of businesses a simpler option for acquiring the said funds. Commonly used for high risk businesses, factoring, though baring some semblance to invoice finance, is slightly dissimilar to it. With factoring, the financial service provider takes control of the business’ debts and manages its credit. This is done to ensure the healthy cash flow of high-risk businesses, new businesses and phoenix businesses. Financial service providers will often consider these businesses as high risk for the fact that they have tight margins with which to operate in. This is why protecting their cash flow is up the utmost importance.

    The yields realised from invoice finance are similar to factoring, though it is primarily considered for businesses that have had a longer term in operation and realize greater revenues with sturdy financial systems. When it comes to invoice discounting, the businesses in need of funding retain control over their debtors and creditors so as to conceal their invoice financing agreement from their patrons.

    Overdraft facility pros

    Benefits of an overdraft:

    • They give businesses more financial manoeuvrability set within contractual limits
    • They are quick and hassle free to set up
    • Most times, businesses are not charged for early repayments

    It is common for businesses to turn to traditional banks for funding and this is where they will receive overdrafts as and when business owners require them. The reason for this is the fact that overdrafts are simple and easily attainable, as long as the business does not have charge over its collateral. Prior arrangements need to be made however in order to ensure that the business is not financially penalized.

    Once attained, it is important for businesses to practice sound financial management over their overdrafts in order to avoid exorbitant charges that may result from misuse. When compared to invoice financing, overdrafts are a more affordable source of funding for many small businesses, but what is perhaps the most important fact is that businesses see decreased interferences from banks, with only periodic requests from them for management figures.

    Overdraft facility cons

    • Repayment requests are not always at a set time
    • Overdraft limit extensions are expensive as they are estimated at 29%. This option is restricted, and many businesses are not able to get their overdraft limit extended
    • Businesses often need to constantly re-apply for an overdraft as and when it is needed
    • Businesses need to own property such as a building or equipment that can be set off against their debt should they fail to repay their overdraft
    • They are made to undergo stringent checks are part of the application process and businesses with unsavoury credit management practices or a poor trading history may be unable to secure it
    • Banks often redefine the terms of the overdraft when the business shows growth, but this does not guarantee an overdraft

    Banks have the authority to lessen or even withdraw overdrafts granted to Small-to-Medium-Enterprises. Added to this, banks can request the repayment of an overdraft at any time. This makes it difficult therefore for businesses to rely on overdrafts as a form of funding for the long run. Coupled also with the fact that banks retain the onus of inflating the service fee and interest charged on overdrafts without attaining consensus with the business, the final downside to overdrafts is that banks will often stunt an overdraft’s limit without considering the fact that it could be instrumental to the business’ growth.

    Invoice finance pros

    Invoice finance has proven to be an emerging industry in the FinTech boom. The main contributing factor for this is the convenience it offers businesses that traditional banks would not consider for overdrafts.

    Advantages of invoice finance include:

    • Great flexibility on limits and these limits are relaxed all the more with healthy sales records
    • Businesses with a poor credit history can access invoice financing
    • Usually no collateral is required
    • Business gain access to a larger amount of funds opposed to overdraft funds

    Businesses with a poor credit history and whose overdraft application has been overturned by established banks can access invoice financing. Furthermore, businesses in need of working capital need not wait 60 to 90 days as per the overdraft application process but can access funding immediately after their invoices have been sent to debtors.

    The main upside to invoice finance is that businesses get access to funds of up to 90% of the amount owed to them by debtors and these funds are released to these businesses within a day of application. Invoice financing also allows for a revolving facility that lends its flexibility to the fluctuation of businesses sales records. Bank overdrafts on the other hand are set at a pre-determined amount.

    Invoice finance cons

    • Only businesses with commercial invoices will be considered for invoice financing which often poses as an impediment to B2C businesses
    • Your profits margins will be decreased on operations going forward
    • When compared to an overdraft it may appear more expensive
    • Businesses may shy away from invoice finances while under the impression that they may be stigmatized

    SMEs have, in the past, refrained from invoice finance due to the fact that they would need to direct a large number if not all their customer invoices to lenders offering factor or invoice finance. Nowadays however, invoice finance companies offer businesses a more selective option that allows them more control over their debts and credit records by selecting the invoices that they are willing to sell.

    Businesses need to be aware of the fact that they would need to adopt sound in-house record management practices over their financial records however, something that is not a prerequisite for an overdraft. Failure to do this may result in future financial complications.

    Why choose either?

    Answering this would be a conundrum since no one solution can blanket all businesses as they are different from one another. It would not be easy to convince a business with a set overdraft from a reputable bank on the merits of invoice finances. If yours is a high-risk business or if its growth is at a rate that could be classified volatile, then invoice finance is a trusted and certifiable way of ensuring that your business remains afloat.

    All businesses vary and no one solution can suit all of them at once. For a tailored business funding solution and professional advice at no charge to you, please call +44 20 8432 2913 or Contact Here.