It appears that a bank overdraft as a means to financing a businesses cash flow requirements is becoming second place behind invoice financing. For starters it appears to be more and more difficult to obtain an overdraft. For many businesses it may be that they can obtain a token amount of £10-£20k and this may depend on the length of time a business has been trading and whether it is profitable or not.
An invoice financing facility such as factoring or invoice discounting is secured against the unpaid invoices of the business. As a rule of thumb you can obtain 80% of your unpaid debtor book on a revolving credit facility. Therefore as your business expands so does the size the available facility. And it doesnt matter how the performance of your business fluctuates it is not repayable on demand.
The problem with a bank overdraft it is repayable on demand. Up until the last year or so it was virtually unheard of for a bank to withdraw an overdraft. Not any more . We are often hearing of situations whereby an overdraft is being reduced following a poor set of results. This will never happen with an invoice financing facility which isn’t repayable on demand. In addition once you get on with a bank overdraft it may be difficult to move away. The bank may offer you a factoring or invoice discounting in addition to your bank overdraft however we often see the total facility being restricted. You may find that you may have had more funding using an independent factoring company or invoice discounting facility that specialise in invoice financing. Beware!!!!!
