Alternatives to a Business Bank Overdraft

Last post: Jan 29, 2019

Alternatives to a Business Bank Overdraft. An overlook into Revolving Credit Facilities, Merchant Cash Advances and Invoice Financing and how they can work as alternative options to a business bank overdraft.

It's not peculiar for an application for a business overdraft to be refused or reduced when applying through your traditional banks (bank overdraft). If you feel like you've hit a brick wall and you're taking it personally, don't fret as there are many alternative options for you to benefit from.

An overdraft is a great way of being able to flexibly improve your business cash flow and is usually quick to arrange. However, if a business overdraft is not available for you, these alternative can help you moving forward:

Revolving Credit Facility

Revolving Credit Facilities work by allowing access to pre-approved funds when a business requires it. This is very similar to an overdraft in which you can choose how much you need and when. You only have to pay what you take and this comes in the form of interest rather than set fees.

Merchant Cash Advance

A merchant cash advance is a finance alternative that we often recommend to seasonal businesses that would rather make payments based on month-by-month revenue. Merchant cash advances work by selling your future monthly card transactions and are popular with business such as restaurants, retailers and online stores.

Invoice Finance

Invoice finance (also known as invoice factoring) allows you to get your invoices paid up front without having to wait until the end of the payment term, keeping up your business's cash flow. Broadly speaking, there are two types of invoice finance available on the market; Invoice Discounting and Invoice Factoring.

Invoice Factoring

Is a way of raising cash based on selling customer invoices. This process involves selling your invoices to a factoring company (a factor) at a discount on a fixed period, usually for 24 months. The factor then manages your sales ledger and credit control during this period, allowing you to have continuous funds based on your invoices, without having to wait for long payment terms.

Invoice Discounting

Is similar to Invoice Factoring, aside from the fact that you manage your sales ledger and credit control. Invoice discounting allows you to sell your customer invoices at a discount on an invoice-by-invoice basis. This is usually more suitable for businesses with one large invoice that they need the funds for in order to pay employees e.g. building contractual work.

What option is best for my business?

This is a question that you'll have to ask yourself when choosing an alternative finance option. Revolving credit facilities offer an extremely similar option to a traditional bank overdraft, however invoice finance offers an opportunity for continuous improved cash flow whilst a merchant cash advance works on seasonality.