Invoice Finance versus a Bank Overdraft

Andy Grantham discusses the merits of IF in comparison to bank overdraft

Banks don’t help

Over the last few years there has been a marked change in the stance of banks and their lending criteria, particularly for overdrafts, and this has been driven by both the economic climate but also changes in legislation which has eroded elements of the security value of the traditional mortgage debenture.

This has allowed the Invoice Finance market to step in and fill some of the vacuum.

In order to compare the two we need to understand how an overdraft is viewed these days from both the banks perspective as well as the clients.

The problem with bank overdrafts…

The main disadvantage with a bank overdraft is that your provider can write to you demanding the immediate repayment of your overdrawn balance along with accrued interest, fees and any charges.

The limit is also fixed and should more be required you generally have to go through the whole application process again resulting in more time and cost. Arrangement fees will be charged each time you renegotiate your overdraft meaning that it’s inflexible and rigid. More charges will also occur every time you exceed your business overdraft limit, even if this is only by one pound. Some banks may consider that you have exceeded your overdraft limit even if you have transferred in funds that have not yet cleared.

From the bank’s point of view, the recent changes in legislation also mean that the banks are increasingly looking for higher levels of personal security. The granting of an overdraft is primarily dictated by the historic financial performance of the client. With the current economic crisis most businesses have seen some weakening of their balance sheet and losses which makes it more difficult for the bank to agree to an overdraft. 

Exactly what is Invoice Finance…

Invoice finance is an umbrella term for types of finance that allows businesses the opportunity to release the cash tied up in unpaid invoices. An Invoice Finance company can advance you up to 100% of the value of unpaid invoices, typically within 24 hours of the invoice being issued however most offer up to 90%. 

Where Invoice Finance wins hands down in comparison to a traditional banking overdraft is that:

  • It generates more cash than an overdraft – usually twice as much
  • Less personal security is required so there’s no need to give a charge over the family home!
  • It is based on the sales you create, therefore grows with the business, meaning you don’t have to keep going back to the bank with cap in hand
  • You can have access to capital almost instantly
  • It’s not based on historic balance sheet performance and is therefore suitable for businesses in turnaround or highly geared.

Having access to working capital based on the sales you have already made means that you no longer have to wait 30, 60 or even 90 days until your customer pays your invoice. That means you can pay your drivers up front, fuel bills, HP on trucks and the VAT on top of that!

It is therefore apparent that, in the current climate, Invoice Finance provides a much safer and more flexible funding solution for many businesses in the logistics and transport sector by providing certainty of contract (i.e. not repayable on demand) and increased funding linked to sales.

Whilst there is an argument that Invoice Finance can be more expensive than a traditional overdraft, most business owners appreciate it is worth paying that little bit extra for greater flexibility and peace of mind. Some even use it to obtain supplier discounts by paying them earlier with the increased cashflow, thus covering the cost of the solution.

What more could you ask for?

Summary…

  • Invoice finance will typically provide you with a twice as much cash as an overdraft
  • The solution is linked to your sales (not your historic balance sheet) and will therefore grow with your business
  • Financial stability is more certain, as agreements are for a fixed period and are not repayable on demand
  • There is no need to put up your home as security
  • With Invoice Factoring, you can outsource management of your entire sales ledger (should you so wish) saving you both time and costs

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