Business overdraft alternatives

This is a form of invoice finance that allows a business owner to borrow money against customer invoices. Instead of waiting for payment, which could be up to 30 days, unless contractually agreed, you can agree to an upfront payment. Though in return the lender will expect fees for this service, which means you will have to offer a discount on outstanding invoices.

For example, Microchip Ltd is owed £100,000 from its customers, but it knows that they don’t usually pay until 30 days+ and some key machinery has broken down, which needs to be replaced immediately. Microchip Ltd can approach an invoice factoring lender and ask for an advance based on the outstanding invoices. The lender will typically ask for 80-90% of the value, after verifying that the invoices are valid. Usually, business owners will be drawn to invoice factoring for the following reasons:

• Predictable cash flow — you can have your invoice paid immediately and avoid the risk of customers delaying payment beyond the standard 30-day payment window.

• Cheaper than a bank loan — in most cases, invoice factoring works out cheaper than a traditional bank loan, making it a good short-term funding option for a small business.

• Reduce overheads — invoice factoring can work out cheaper than employing accounts staff to chase outstanding customer payments, including in the worst-case scenario the need to hire a debt collection service.

Factoring is when invoices are sold to a factoring company, and invoice discounting is similar but the borrower keeps control of the administration of the sales ledger. When it comes to factoring a 3rd party will take over control of your sales ledger and assume responsibility for collecting any money owed to your business.

Also known as a line of credit, this type of business loan is suitable for small to medium-sized businesses that need flexible access to cash in the normal course of business. Business owners are drawn to this form of working capital finance for business transactions. The credit limit is fixed in the same way as a business credit card or overdraft facility. You can borrow money, purchase an item of stock, for example, and pay it off before the agreed date. The terms on offer will be dependent on the financial situation of your company. This type of lending is open-ended, you can borrow, repay, and repeat for the duration of the term, with no limits, other than the credit limit. This gives finance managers more control over borrowing when compared to other alternative finance lending options.

The final type of lending that we will cover in this article is invoice finance. Similar to factoring and invoice discounting, invoice finance involves borrowing money backed by the accounts receivable owed to you from customers. This fast-tracks the payment of outstanding invoices and eliminates the need to wait for contractual payment terms. The difference between factoring and invoice finance is where factoring takes the entire outstanding sum, invoice financing takes only the invoices that you choose to sell. Hence, you retain control of your accounts receivable, and all administrative responsibilities.

Factoring tends to be more expensive than invoice finance as you are paying for a debt collection service, while with invoice finance your accounts department will still have to do this. Before applying for any type of lending, please always check that the company is regulated by the Financial Conduct Authority who currently regulates over 50,000 financial services firms and financial markets in the UK.