Decision time: Invoice Finance vs Overdraft Replacement

Published on 15th June 2018 - Last update on 5th November 2018

As your business continues to trade, you may run into periods where you’ll need access to quick cash. Whether it involves smoothing out uneven cashflow, paying staff wages, replenishing supplies, supporting existing projects or stimulating growth, the secret to success has always been sourcing an appropriate finance solution for your business. During such scenarios, two finance solutions in particular could prove invaluable: Invoice Finance and Overdraft Replacement. But how can you tell which one is the most suitable for your business?

Advantages of Overdraft Replacement

For many UK businesses, Overdraft Replacement represents a quick way of acquiring funds for a wide range of purposes, which is helped by the fact that they’re usually subject to little or no usage restrictions, much like a credit card. They’re also quick to establish, with decisions usually being made in as little 48 hours, after which you’ll gain access to a line-of-credit (LOC) that enables you to instantly draw down an allowance. The size of this allowance is based mainly on your business’ past income, so you’ll need to provide past and recent bank statements and profit and loss statements with your application, as well as access to your credit profile (both personal and business). Plus, it’s also worth noting that you’re not obliged to use the allowance and you’re only charged interest on the funds that you withdraw. Once you’ve repaid what you’ve withdrawn, usually within 30-90 days depending on the agreement, you can go on to instantly withdraw and repay funds yet again on a revolving cycle. In addition, Overdraft Replacement doesn’t involve your bank account and can arrive be classed as either secured or unsecured, making them accessible to a wide range of financial situations.

Unexpected payment demands? Need help maintaining your day-to-day operations and supporting growth? Apply for a Quick Business Loan today or learn more about how your business could benefit.

Advantages of Invoice Finance

Another popular finance package with business owners is Invoice Finance, which enables you to release up to 90% of the capital sealed away in any unpaid business-to-business (B2B) invoices worth in excess of £5,000. As such, Invoice Finance doesn’t impose a fixed credit limit, since the advance that you could borrow is based on the total amount of capital associated with the invoice. In addition, the agreement is repaid by the debtor responsible for the invoice, typically within 120 days, and when the debtor has fully repaid what they owe in the invoice, the lender releases a balance which would make up the remaining 10% (in this instance) minus costs and fees.

Disadvantages of Overdraft Replacement

One downside of Overdraft Replacement is that some business owners may find this solution to be restrictive. This is because if you withdraw more than what the allowance provides, lenders will charge you an Overdraft Penalty. Plus, you may occasionally need to negotiate the allowance in order to prevent the credit limit being reduced by the lender.

Disadvantages of Invoice Finance

In comparison, Invoice Finance can be more expensive than using an Overdraft Replacement on a like-for-like basis in certain situations. It’s also classed as a secured finance solution which uses the money contained in the invoice as collateral, meaning that if the debtor goes bankrupt or fails to repay the money they owe, your business may be required to repay the agreement in their place - unless you’ve taken out Bad Debt Protection with the lender (which might be available if using Invoice Factoring). In addition, you’ll need to maintain up-to-date business ledgers, with Invoice Discounting also requiring you to demonstrate and execute successful credit collection operations.

Need help sourcing an appropriate finance solution for your business?

In order to maintain and grow your business successfully, making sure that you’ve got access to sufficient amounts of capital as and when they’re required is vital. However, despite the necessity, acquiring funds for your business isn’t always easy - especially at short notice. This is why speaking with a qualified business professional is so crucial. At Rangewell, we’re an Access to Finance specialist who has mapped over 400 lenders to offer you an overview of more than 23,000 business finance products. Our services are free to use and we’ll also guide you through the application process. We’re with you every step of the way. So if you’re looking to raise capital for your business at short notice, apply for a Quick Business Loan today or find out more with Rangewell.


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David Harrison

David Harrison

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