Invoice Financing Vs. Business Overdraft

By Per Frennbro in Financing

Maintaining positive cash flow can be regarded as one of the biggest challenges that small and medium businesses face. A profitable business can experience cash flow problems and this is quite natural. However, the main problem arises when a business starts growing quickly. In spite of making enough sales, there can be a significant lack of money between the time when money is spent in creating products or offering services and when the payments are received from the customers.

In order to get the working capital they need to fund their business operations, generally, SMEs turn to banks for commercial or business overdrafts. So, what is this business overdraft? With a business overdraft, businesses can get credit from banks for a limited period and to a predetermined limit. The business can then make payments as well as withdrawals in order to fund its operations. However, most banks have strict lending criteria in this regard and they need you to provide your personal or commercial property as security. As a result, these days, more and more businesses are turning towards invoice financing and factoring, which is a more favorable option.

Here’s a brief comparison between invoice financing/factoring and business overdraft:

Upper limit

Depending on the past history of your firm, there is an upper limit to the overdraft facility. As your business continues to grow, you will need more working capital, but getting the overdraft increased can be a real problem. It can not only take a lot of time but also has the chances of getting rejected. On the contrary, there is no such limit to invoice finance. You can opt for invoice finance whenever you need it.

Security deposit

One of the main disadvantages of business overdraft is that it requires putting commercial or personal real estate as security as a collateral. However, the case is not the same with invoice finance, as it does not put your assets at risk. The value of the invoice is all you need to secure invoice finance for your company.

Access to funds

The paperwork, as well as the property valuation that is needed for a business overdraft, can take weeks to even months. On the contrary, you can get hold of invoice finance in as less as one hour, depending on the factoring company.

Requirement for approval

In order to avail business overdraft, the bank will have a closer look at your business history. If you had a slow time in the past or if you are a new business, it can greatly affect your ability to be approved. However, invoice finance depends on the value of your outstanding invoices.

What you also get through an overdraft is a credit limit that becomes lower, ie you can buy on credit to a lower value. Invoice financing/ factoring does not affect this at all which gives your company better credit scoring also.

At FRENNS, we understand your need to get a good cash flow for your business. We are here to help you grow and you can even do financing for free if you invite your friends to FRENNS. And that is why we are here with our invoice financing platform, allowing you to make your small business grow and reach levels that you have only imagined.

About the Author: Per Frennbro is the CEO of FRENNS, which offers high speed, low cost invoice financing for small businesses. As a serial entrepreneur, Per focuses on helping both small and medium sized businesses take control of their cash flow. Visit https://www.frenns.com and see how you can turn your invoices into working capital to help your business prosper.

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