Finding the right alternative to a revolving credit facilityPublished on 27th March 2017 2017-03-27T21:24:49+00:00 - Last update on 4th December 2019 2019-12-04T00:09:04+00:00
It used to be that you would have to go to your bank and ask for an overdraft, but banks are now less willing than in the past to offer this type of funding. This has meat that alternative products, such as Overdraft Replacement, or Revolving Credit Facillity, have stepped in to offer business flexible access to cashflow.
What actually is a Revolving Credit Facility?
Before we begin looking into what you’re alternative options are, we must first understand what a Revolving Credit Facility is. In essence, it is a 3rd party account that you can quickly withdraw funds from when necessary. The lender responsible for this account will set down an allowance each month that you can use to support your business. Paying interest on anything that you borrow, if you happen to withdraw more than the specified amount you’ll be charged an overdraft fee. So if you use a credit card, you’ll find that the inner workings of this product are very similar. It’s also good to know that you are not obligated to withdraw funds. Therefore, if for one particular month you don’t use the account you won’t be required to pay for that period.
What are your options?
What makes this type of finance so popular is the ability to acquire quick cash, but there are also many other business finance packages that offer the same benefit. If you happen to find that using a credit facility is too constricting and unable to offer the kind of funds that you need, the alternative finance industry can help. Of the many packages on offer, two of the most popular are Invoice Factoring and Merchant Cash Advance (MCA).
What is Invoice Finance?
Invoice Financing can offer you fast targeted cash using the money tied up in your business’s unpaid invoices. Having customers delaying or not paying for the goods or services they’ve received can be a headache for any business owner, especially if it involves large sums. If you’re considering this type of finance, you must be aware of the two types available: Factoring and Discounting.
- Factoring: Invoice Factoring can offer you a lump sum equal to around 90% of each invoice’s total value and use it to support your business whilst you await payment from the customer. Plus, until the customer completes payment, you won’t be required to begin the repayment process. However, that said, lenders may choose to specify a term outlining how long they’re prepared to wait. Should this period elapse with the customer still not paying, you’ll be required to begin making repayments regardless.
- Discounting: Again, with this option, you’ll still acquire a lump sum, but this time it’ll be in the region 80% of each invoice’s total value. Plus, this time your customer will be required to pay directly to your finance lender. At this stage, you can either choose to be the credit controller or, if available, use your financier’s ledger service. Once they’ve received full payment from the customer, you’ll be required to transfer the remaining 20% into a facility run by the financier. After any incurred costs and fees, the sum or balance is then returned to you.
What is Merchant Cash Advance?
Often mistaken for a type of loan, this option uses the potential contained in your monthly credit and debit card sales. As such, in order to qualify, your business must be able to support devices such as Chip & Pin. You will be required to present any potential lenders with 3 or more consecutive sales reports, allowing lenders to gain a thorough understanding of the reliability of your card paying customers. Should they like what they see, they’ll offer to buy your revenue or receivables for one particular month. This is where a Merchant Cash Advance truly differs from a business loan. Instead of making fixed monthly payments, the lender will instead take a percentage of each of your card sales until the product has been repaid. For example, a lender might offer a rate of 18% which in turn means they’ll be taking 18p from ever £1 your card customers spend. What makes this product so popular among business owner alike is the fact that lenders do not take into account your credit score or business history; reliable card sales are all that matter.
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