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What’s the difference between invoice finance and a bank overdraft?

There are many ways to fund your business, whether you’re just starting up or expanding an established firm. Numerous businesses depend heavily on their overdrafts, dipping in and out of the red whilst waiting for large payments to be received.

However is this the most cost-effective and reliable way to work? Invoice factoring is lesser known than the more traditional types of lending but should be seriously considered by business owners.


What’s an overdraft?

An overdraft is an agreed sum of money added to your business account by your bank, which can be borrowed when you need it. An overdraft can be used in an emergency, but fees can be attached if you go past your agreed limit.


What’s invoice factoring?

Invoice factoring can help manage your cash flow, ensuring that your business isn’t damaged by late payments or unexpected bills. An invoice factoring firm can release up to 90% of an unpaid invoice, leaving you more time to focus on your business. A good invoice factoring broker will be able to put you in touch with the right invoice factoring company for your type of business.


The best option?

These two methods of lending are very different, but is one better? The advantages of an overdraft include its flexibility, as it can lie unused if you don’t need it, but many businesses like the safety of knowing it’s there. It can be cheaper than a bank loan and you can pay it off at any time.

One drawback to an overdraft is that they can be expensive, incurring substantial charges each month, if you exceed the agreed limit. Another drawback is that you have no choice of lender, you can only arrange an overdraft with your existing bank and so can’t look for an alternative deal.

Should a business choose invoice factoring, they will be able to select from a range of firms presented by your broker. Factoring takes away the uncertainty, as the debt will definitely be paid. However with an overdraft there is no guarantee that your client will pay.

Another advantage to factoring is that it allows for business expansion. Expansion requires capital and an overdraft might not provide as much as you need to develop, if based on business history. However Invoice factoring looks at the amount of business you are taking on and offers flexibility as your venture grows.


Unfortunately there is no right or wrong way to finance your business because each firm’s circumstances are unique. An overdraft might be a good option for a business with a consistent turnover but invoice factoring can be ideal for start-ups and expanding businesses.


To find out more about your options, call a member of the Alliance Commercial Finance team on 01789 761374 and see how we can help your business today!



Added: 01 Dec 2015 12:33

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