Declined by your Bank – What are the alternatives to a Business Overdraft.
In simple terms Banks are not providing as many Business overdrafts as they have done over the years. So what are the Business Overdraft Alternatives – we take a look below.
Before we take a look at the alternatives why do Businesses use overdrafts. Quite simply it is the ease and quick access to funding which makes them appeal. It also allows a business to borrow the banks money without impacting too much on their own cashflow. A business could simply dip into their overdraft for a short period of time and then repay when cashflow allowed.
Overdrafts when working well are an ideal source of cashflow, however, when they don’t work well this causes concern to the banks. It is this concern that allows them to cancel the overdraft on demand. This could and has caused many businesses significant hardship over the years.
Alternative Funding Options to a Business Overdraft
Flexi Draft / Revolving Credit
These types of facility are technically overdrafts, however, as they are not attached to a Bank or bank account they are not able to be called overdrafts.
In theory these types of funding products work no differently to an overdraft.
The key difference is the cost and also that they can not be accessed by the main bank account.
Quite simply these type of facilities provide a level of borrowings for a business to utilise. A pre-agreed limit will be provided by the lender.
As with normal overdrafts once set up the main costs are from utilising the facility. If the facility is not used then a business would only pay the set up charge. The only other charges would be a renewal charge every 12 months.
Many lenders will require the interest to be repaid as a minimum per month. These types of facilities are usually reviewed on a annual basis. If everything is running as it should then the lender will likely renew for a further 12 months.
Invoice Finance (Factoring / Discounting)
If a Bank has declined an overdraft then this is likely to be a credit rating issue with the business. If a Business has poor credit then most will look to consider Invoice Finance as an alternative.
Why Invoice Finance?
Lenders place more emphasis on the debtors when an Invoice Finance facility is utilised. This is because it will be the debtors who ultimately will be repaying the lenders money back. A lender will therefore take less interest in the credit rating of the Business.
Invoice Finance is becoming a more popular product on the market as it is not limiting by the amount which can be borrowed. As long as there is a Business to Business transaction and an invoice raised on credit terms then funding is likely to be made available.
The way Invoice Finance works is that your business raises an invoice as normal and sends one copy to the debtor and one copy to the lender. The lender will then agree to pay a percentage of the invoice value up front (usually 85%) less fees. When the invoice becomes due either the lender or the business will chase the invoice and when the invoice is paid the remaining 15% not already advanced will be sent over to the business.
Invoice Finance has evolved over the years and is now a flexible facility. This means that a business can get funding from a single invoice all the way through to a full Sales ledger.
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Merchant cash advances
If your business uses a card machine to take payment from customers, you could be eligible for a merchant cash advance. Like overdrafts and revolving credit facilities, you’ll have a pre-agreed borrowing limit, but it’s based on your card sales specifically.
Usually your limit will be the equivalent of 1 month’s average sales, so a key part of the application process is giving the lender access to your card terminal data.
Perhaps the best part of merchant cash advances is that because the lender works with your card terminal provider, you repay automatically as a percentage of sales.
For example, if your agreement specified an 80/20 split, a sales transaction of £100 would automatically repay £20 to the lender and transfer the other £80 to your bank account as normal. As card receipts fluctuate your business will repay a different amount each month.
This may be a better arrangement for your business than the fixed monthly payments that often come with standard loans. The main downside is that merchant cash advances tend to be quite expensive.
Business Overdraft Alternatives Conclusion
Although business overdrafts are a useful thing to have in place, it’s clear that they’re not your only option.
Banks are actively reducing the amount of overdrafts to businesses. A trend which has continued for many years. The banks like to see more structure to their lending and more security cover against assets.
Some of the above alternatives mentioned above could also be faster to set up than a bank overdraft too.
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