When you’re comparing a bank overdraft with invoice finance, you should go beyond looking at the interest rates and the amounts you can borrow. One of the big differences between the two is that an overdraft, while it can be hugely convenient, can also be withdrawn by the bank at any time.

The practical benefits of having an overdraft or invoice finance facility

It’s almost the end of the month and you’re facing a sizeable payroll bill. You don’t have enough cash available to pay it. You were relying on a customer settling a big invoice by the end of the month, but you’ve just heard that won’t happen. Suddenly you’re facing a cashflow crisis.

This scenario plays out all too often in businesses across the UK every month. Fortunately, there are mechanisms, such as overdrafts or invoice finance, that give firms access to the cash they need. Having either one of these facilities in place can help reduce short-term cashflow worries.

While both can solve your cashflow problem, there are some significant differences between the way overdrafts and invoice finance work. As a business owner you should understand these differences, because that will help you to choose the one that’s most appropriate.

The benefits of bank overdrafts

As a route to short term cash for your business, a bank overdraft offers several advantages.

• It can be accessed quickly and easily when you need it.
• It’s very flexible, up to the limit agreed by the bank.
• Any cash that comes into your account, such as customer payments, reduces the balance and the borrowing costs.
  

You do need to agree an overdraft facility in advance with your bank. 

The disadvantages of bank overdrafts

While being very flexible, bank overdrafts aren’t always the best solution to short-term cashflow fluctuations.

• An overdraft can be difficult to arrange, because your bank may be put off by your trading history or low credit scores.
• The borrowing limit you agree may be difficult to extend as your business grows and demands on your cashflow change.
• Your overdraft can be withdrawn at any time and becomes repayable on demand. This can happen without warning, creating a major cashflow crisis.
  

Having an overdraft facility can be extremely useful to cover very short-term working capital needs, but it’s not well-suited to be a method of financing growth. 

The benefits of invoice finance

Many small and growing businesses have taken advantage of invoice finance or factoring. 

• It’s typically very flexible, with the amounts you can borrow being linked to your sales ledger, not to a fixed amount.
• The amounts you can borrow can often exceed what’s available through an overdraft.
• It’s more accessible to businesses with weak credit histories or performance records.

It’s possible to set up an invoice finance arrangement very quickly, which is useful when your business is facing a cashflow crisis.

The disadvantages of invoice finance

There are situations where invoice finance may not be the most appropriate method of raising working capital.

• It’s not suitable for most businesses that sell to consumers. However, it can be very useful in B2B situations.
• A third party is being added to the relationship between supplier and customer, which can sometimes create administrative issues.
• Not all business owners feel comfortable using invoice finance.

The choice between an overdraft and invoice finance, as a way of raising working capital, comes down to numerous factors, making it impossible to generalise over which is better than the other.

How we help businesses raise finance

If you’re considering whether to take out an overdraft facility or set up invoice finance, we suggest you talk to a business finance specialist such as ourselves. We’ve helped numerous UK businesses find a finance solution that works for them. 

Rather than waste your time trying to decide what’s right for you, give us a call and chat through the options with one of our finance team.