Overdrafts v invoice finance

18/11/2019

Many businesses are still reliant on a bank overdraft as a method of funding. But is this the best option available? Here we compare overdrafts with invoice finance to see which facility comes out on top.

Flexibility

Invoice finance is more flexible than more traditional finance as the cash you can access grows in line with your sales ledger. Also, contracts lasting as little as 30 days are available, or for greater flexibility you can finance one-off invoices on an as-needed basis so you do not have to fund your whole debtor book. In contrast, overdrafts, which are normally reviewed annually, are very rigid as the amount you can access is set at the outset and exceeding this limit will result in charges. Also, the bank has the right to reduce your overdraft or recall it at short notice.

Speed

Bank overdrafts are often quick to arrange and once in place they allow you to access money to pay for something when you would otherwise have no money in the bank. Similarly, invoice finance also works quickly and you can access up to 90% of an invoice’s value in just 24 hours, allowing you to bridge the cash flow gap between paying suppliers and receiving payment from your customers.

Expertise

Credit control can be built into factoring facilities to reduce overheads, while credit protection can also be added. An overdraft meanwhile is simply a method of funding and does not come with any additional expertise.

Stability

The bank has the right to ask for repayment of your overdraft at any time which could be damaging to your cash flow if it comes unannounced. And if you don’t use your overdraft it may be reduced at short notice. In contrast, invoice finance solutions cannot be recalled on demand giving you greater peace of mind.

Cost

With an overdraft you only borrow what you need at the time which may make it cheaper than other forms of finance. And banks don’t normally charge you for paying off the overdraft earlier than expected. But your bank could charge you if you exceed your overdraft limit without authorisation and if you want to extend your overdraft you usually have to pay an arrangement fee. Invoice finance charges vary based on a variety of factors such as service levels and business size. The discount charge is linked to the amount of money you draw down. In addition to this, there is usually a service or administration fee. When looking at the cost of any finance facility it is prudent to also look at the cash flow benefits and associated savings.

Accessibility

Invoice finance is only available for B2B companies who trade on credit terms and it is better suited to certain industries. You can only get an overdraft from the bank where you maintain your current account.

Suitability

This largely depends on your business and its needs. When cash flow is tight, overdrafts give businesses a flexible way to manage short-term borrowing. But longer term overdrafts can be damaging to businesses. The interest rate applied is nearly always variable, making it difficult to accurately calculate your borrowing costs which could impact on your cash flow forecasts. Also regularly exceeding your limit can be very costly. In contrast, invoice finance is a flexible facility that can be tailored to your business’s needs. And the amount you can access grows in line with your business, making it more suitable for growing businesses or those requiring a longer-term solution.

If you need help reviewing your existing facility or finding a new funding solution that better suits your business’s needs we can help as an independent finance broker. Contact our team today on 0800 9774833 or email info@hiltonbaird.co.uk to find out how.