Invoice Finance or an Overdraft

bank-overdraft

This seems to be a debate that goes on as to whether an invoice finance facility is better than an overdraft facility. From my perspective very few businesses are actually presented with this choice. We will of course do a comparison of these two forms of working capital but it is rare for a business to be offered a choice between invoice finance and an overdraft.

Banks now prefer to lend by way of invoice finance rather than an overdraft facility. This is because of a test case that is often referred to as the Brumark case. I won’t go into detail here as there is enough blurb on the internet about it but in essence it means that banks are no longer secure against the debtor book of a company by using a fixed and floating charge or debenture. As such invoice finance is the preferred route. Conveniently invoice finance also generates considerably more income for the banks than overdrafts do.

So how do we compare invoice finance against an overdraft facility?

How readily available are they?

As already mentioned, overdrafts are not so readily available where the security or asset within the business is the debtor book. Typically to secure an overdraft the banks will require additional security such as a charge over commercial or residential property.
Invoice finance is readily available but only to businesses that sell to other businesses on credit terms. It is however available to new start businesses, loss making businesses and small businesses as well as large, profitable, well established businesses.

How do costs compare?

A lot of websites like to show invoice finance costs as being comparable to an overdraft facility. I think this is ridiculous and an invoice finance facility is nearly always more expensive than an overdraft and considerably so. This is probably best demonstrated by way of an example. Let’s consider a business with a turnover of £1m, a debtor book of £100,000 with a working capital requirement of £80,000. Let’s also assume they borrow £80,000 for the overdraft.

 Close BrothersFunding Solutions Option
Limit£500,000£500,000
Service Fee0.65%£833 p.m. flat fee
Discount Fee2.5% over base subject to a minimum of 4%2.6% over bank base rate
Monthly Minimums£1,250£833

As you can see using the example above invoice finance is typically considerably more expensive than an overdraft facility. You also have to be aware of potential additional costs using an invoice finance facility.

Which is more flexible?

Flexibility is a real advantage of invoice finance. As your business grows the facility should grow with you. However, if your turnover is seasonal as your turnover shrinks in the quiet times your facility will also shrink. This means it is a great form of working capital for funding variable costs.

An overdraft facility is typically fixed and any increase will be linked to available security rather than turnover. However, during quiet times it is still available.

Which is best for my business?

That is hard to answer without understanding your business and it’s requirement. However, it is safe to say that if an overdraft is available for your business and you are happy with the security requirements then it is likely to be the cheapest option.

If an overdraft is not available or you are unwilling to offer the security required then you may have little choice in accepting an invoice finance facility. An invoice finance facility can provide businesses with a flexible source of working capital to assist in growing their business.

If you need an invoice finance facility your challenge is structuring one that will work for your business. This is where Funding Solutions can assist. Contact us today on 0845 251 4040 or finance@fundingsolutions.co.uk