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Finance Guide: Overdraft Replacement

Published on 10th May 2016 - Last update on 31st March 2020

Historically a bank overdraft has been the classic route to iron out the peaks and troughs of a businesses uneven cash flow.

Since the credit crunch, however, this type of facility has become increasingly difficult to either obtain or indeed maintain at a level that is required by a business. This has led to the emergence of a new breed of lenders who provide  alternative methods of funding that can either support or replace an existing overdraft.

Alternatives to a traditional overdraft

These alternatives cover three key products:

  • Merchant Cash Advance – these are effectively turnover loans based on debit or credit card sales. For example, if your revenue is paid via card terminals, you will receive an advance amount based on the last few trading months. This means your repayments will be variable and more will be paid in a good month and less in a bad month with lower sales.
  • Alternative Overdrafts – overdraft replacement products are similar to a bank overdraft and are provided by a number of specialist lenders. Generally a maximum borrowing amount is agreed based on past income and then it is up to the business how much of this limit you use and when. This is a powerful form of funding for businesses who like flexibility because you only pay interest on what you draw down and use. Often these loans are unsecured, however on occasions security may be required.
  • Revenue Loans – revenue loans are granted and based on the analysis of a business’s most recent accounts . A loan amount is agreed and the repayments are calculated as a percentage of future monthly revenue. This ensures that a business can always afford its repayments and like merchant cash advances it is structured so repayments are higher in good times and lower in bad times.

Making sure you have the right finance for your business is complex and can often be confusing.

There are so many options that can seem very similar, but which when reviewed closely can be very different in terms of monthly payments, overall costs, up-front fees and terms and conditions.

If you’d like to talk to one of our Business Finance Specialists:

Call us on 020 3637 2455

Or email us on [email protected]

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Sarah Thornton

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