Alternatives to an Overdraft

Many businesses continue to find that an overdraft from their bank acts a reliable first line of working credit. In these tough economic times, however, not every business can obtain the type of overdraft which they would like. Those lucky enough to obtain traditional bank credit often find that it is now surrounded by significant fees and tight conditions. As a result, businesses are turning to other methods of obtaining short-term cash.

An increasingly popular method is known as invoice finance, the two most popular variants of which are factoring and invoice discounting. Both involve the same basic concept, in which the business hands over the rights to receive money from a recently issued invoice, in return for an immediate cash payment. These payments vary depending on the companies involved, but typically range from 75% to 90% of the invoice. Factoring is more common, and involves handing over the process of collection to the finance agency itself. Invoice discounting means that your business retains the collection process and simply pays over the money to the finance agency, but is often only available to larger businesses which the agency feels can be trusted.

The obvious attraction of invoice finance is that you already know that the money will be repaid, as long as you trust your customer to honour the invoice. As a result of this increased certainty, the amounts of money available through invoice finance are often greater than can be obtained through a traditional overdraft. Additionally, the potential issue of your bank cancelling your overdraft with little or no notice is avoided. Of course, as with any method, there are pros and cons to invoice finance. You may not want your trusted customers being chased for payment by often aggressive finance agencies, and may wish to keep invoicing under your own control.

If you require significant amounts of money for an infrastructure purchase, some forms of hire purchase agreements may be able to replace the money you would have used from your overdraft. Using these, you can gain immediate use of the asset required and make small monthly payments which are covered by your usual income streams. Should you already own a significant asset, you may also be able to reverse the process by arranging a type of asset finance which amounts of a mortgage on your infrastructure, and provides you with immediate working funds.

Of course, not all businesses can negotiate sophisticated deals, particularly as they begin operation. There may be no alternative to drawing on personal savings from directors, mortgaging personal assets, or even putting out a call for funds to your friends and family. Before you go to such lengths, however, remember that a simple phone call to your suppliers may also yield dividends. If you are a faithful customer, it may be possible to negotiate a deferred payment scheme which effectively will act as extra funding for your business, at least in the short-term. An overdraft is helpful, but certainly not the only method available.

We can offer you financial solutions to help keep your cashflow healthy. Request a quote now to find out how much invoice finance can save you.


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