Invoice Factoring – better than an overdraft

With the nation split over whether £81bn spending cuts will lead to a ‘double dip’ recession one thing that unifies the public and small business owners is the lack of bank lending being made available.

Even when all the figures proved small business lending levels had not improved since the bank bailouts, and promises given that credit lines would be flowing again, the banks responded with “there is no appetite for borrowing…” and “small business owners are paying down their debt in order to reduce outgoings and are not in the market for small business finance..” etc etc.

Even though there wasn’t a soul in the UK that believed the comments, the banks held to them.

In the last few days the Asset Based Finance Association (ABFA) announced that invoice finance facilities taken out by UK SME’s had gone up by 7% compared with the same time last year, and that bank lending was down another 2%. Its one thing not to tell savers above interest rate changes (for the worse) but denying the overwhelming facts that UK businesses are in need of small business finance is in short an outright lie.

So back to overdrafts versus invoice factoring!

The main problems with a bank overdraft, is that under the current climate, banks have priced out small businesses out of the market for overdrafts just as they have with first time buyers.

A first time buyer is now expected to find on average £37,000 for a deposit in order to qualify for a mortgage, assuming they have a perfect credit score that is. And it’s no different with small business finance such as overdrafts.
With even small business overdrafts for a profitable business, banks are now requesting previously unheard of levels of security. If you are a start-up business, unless you are willing to offer personal guarantees and a charge over your home you may as well not even apply.

Overdrafts are not used as loans but as a bolster for working capital. With cash flow still the biggest small business killer, an overdraft (was) a means to maintain liquidity over short periods, to plug the gap between sales invoices getting paid, and business costs going out.

And it’s this point of liquidity that is another issue with overdrafts in their current state. Where previously businesses could borrow a month’s turnover to avoid cash flow problems and as the business grow, the overdraft would be reviewed by the business bank manager, now the tide has turned. Even in times of business growth and widening profit margins the banks are looking no longer at how much the can lend, but how much they get existing facilities reduced. Put simply, they just don’t want the business of traditional lending as we know it.

Therefore as a business grows now and you need to increase the amount of working capital an overdraft isn’t the solution as it simply wont grow. But there is yet another sting in the overdraft tale.

Overdrafts are repayable on demand.

Before the recession a bank wouldn’t dream of calling in an overdraft for a profitable business that stays within its agreed facilities. But now the climate has changed, post credit crunch the banks have shown their true colours and like store card and credit card providers did with consumers, banks are either calling in the whole facility, or switching any overdrawn balances to a very short term loan and removing the overdraft facility.

The national and local news have been awash with such instances about banks withdrawing overdrafts and forcing companies into administration.

Still want an overdraft?

With factoring or invoice discounting, as long as you don’t breach the terms of the facility agreement it is not possible for the facility to be withdrawn. Furthermore, even if you did breach the terms it is more likely that your factoring or invoice finance provider will work with you to a mutually satisfactory solution.

Unlike an overdraft, factoring or discounting facilities are tied to your sales ledger and you only get advances against what ever sales levels you currently have. If your sales dip, you are not (unlike with an overdraft) left high an dry servicing a facility you can ill afford to, and if your sales grow, the facility grows too, meaning that you can, without putting up your home, see the fruits of your labour and realise the cash from your sales invoices in hours.

Factoring Finance Ltd have over 30 years of finding the right factoring or invoice discounting facility and provider for our clients. We have an extensive and independent UK wide broker network so if you want to find out more about invoice finance, and are sick of being turned away by the bank, simply give us a call.

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