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What is an Overdraft Replacement Facility?

Published on 22nd May 2018 - Last update on 8th January 2019

Although growing your business and ensuring sustainability no doubt sits at the top of your list of priorities, making sure your cash flow each month can keep up with your plans isn’t easy. As your business continues to operate, you may run into seasonal trading high and lows, but if your monthly revenue falls below what’s required over a prolonged period it can cause problems when managing your finances. If you do encounter such a situation you might consider applying for an Overdraft Facility, but that isn’t the only option that’s available to you. If you’re looking for external funding in order to support your business’ finances, here’s what you need to know when considering an Alternative Overdraft.

  • Why apply for an Overdraft Replacement?
  • How does an Overdraft Replacement work?
  • How is an Overdraft Replacement repaid?

Why should I apply for an Overdraft Replacement for my business?

If you’re currently suffering from, or are expecting, a slowdown in monthly sales it can cause issues which may affect your ability to control your business’ finances, pay staff, cover utility bills, acquire fresh stock or pursue vital projects. As a result, maintaining a reliable rate of growth and ensuring long-term sustainability could prove challenging, especially without external support. Although you might consider setting up an Overdraft Facility which could work alongside your current banking arrangements, obtaining such an agreement can be hard to come by ever since the banking crises. An Alternative Overdraft works in a very similar way to a bank overdraft, so if your business would benefit from a traditional overdraft but you’ve been unsuccessful, then an Overdraft Replacement Facility could be appropriate.

Expecting to run into a low revenue period? Need help supporting your finances? Apply for an Overdraft Replacement or learn more about how your business could benefit!

How does an Overdraft Replacement facility work?

Rather than risk putting further pressure on your working capital by using your own savings, you could take action now in order to safeguard your business. Overdraft Replacements can be classed as either Secured or Unsecured, and are designed to be used as a short-term business finance solution, with no usage restrictions. By choosing to apply for an Alternative Overdraft you could receive a Line of Credit (LOC) which allows you instant access to a monthly allowance. The size of the credit limit for this allowance depends on your business’ past income and, unlike an Overdraft Facility, doesn’t involve a bank account. From here, it’s up to you to decide how much of this allowance to use, with no obligation to withdraw any of the funds available. Note that anything that you do withdraw may need to be repaid within 30 - 90 days, and you are only charged interest on the funds that you’ve taken.

What does my business need to qualify for an Overdraft Replacement?

When entering an application for an Overdraft Replacement, the first thing you need to consider is whether to use a secured or unsecured product. Using a secured solution would mean offering assets such as equipment, machinery or vehicles as collateral, whilst an unsecured solution doesn’t require such a commitment. However, it’s worth remembering that offering security could allow you to gain more favourable terms and a larger credit limit, but your assets may be at risk if you default on your agreement.  

From here, you then need to decide which documents you need to submit with your application, granting lenders a stronger understanding of your business’ financial performance and how you operate. As well as assessing your credit profile, lenders may ask to review sales reports, latest/past bank statements, profit/loss statements and customer orders. In addition, lenders will also assess the strength of your credit score and check whether you have any outstanding CCJs, Arrears, Accelerated Payment Notices and a reliable history of settling debt on time. This will allow them to determine the risks involved, which affects the interest rate that you’re offered. Therefore, the weaker your score the more interest you’ll need to pay on any funds that you withdraw, and vice versa.

Does your business need help coping with uneven cash flow?

If you’re suffering from the effects of uneven cash flow, acting sooner rather than later could make all the difference. Although your first thought may be to turn to your bank for an overdraft facility, taking a step back and exploring what other options may be available could allow you to source a solution that’s more appropriate for what your business’ requires. All you need to decide is which lender to apply to. Luckily, we’ve already done the hard work for you! So if you’re in the middle of a temporary low revenue period and need help covering your operating costs, apply for an Overdraft Replacement today or find out more with Rangewell.

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David Harrison

David Harrison

Content writer
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