Hopefully now that we are out of the recession we will once again start to see businesses grow and to flourish. The benefits of invoice factoring during a period of growth are obvious however many businesses will be tempted to go down the overdraft route which in the long term may restrict a businesses cash flow and ability to operate from a liquidity point of view. It is also important that we choose the right factoring or invoice discounting company because not all of them are the same and they don’t offer the same level of funding and flexibility.
The two main problems with bank overdraft the level of the facility is often restricted by the amount of security available. A token overdraft facility without providing additional security may be available depending upon the level of profitability however more often than not it is never enough. Therefore as a business grows and you need to increase the amount of working capital it may be difficult to obtain an increase. Secondly overdrafts are repayable on demand. Until the recession I don’t think anyone believed the bank would pull overdrafts however during the credit crunch and the recession the banks have shown their true colours. We have heard horror stories about the banks withdrawing overdrafts and forcing companies into administration. With factoring or invoice discounting, so long as you don’t breach the terms of the facility it is not possible for the facility to be withdrawn. And even if you breach the terms of the facility it is more likely that your factoring or invoice discounting provider will work with you to a satisfactory solution. It is therefore important that you choose your factoring or invoice discounting company carefully to make sure they are approachable and potentially flexible. It is more likely this will not be a bank owned provider but this doesn’t mean a facility will be more expensive.
