According to recent research, the vast majority of UK companies will be more likely to rely on their overdrafts for capital than to seek any other form of financial help, particularly invoice finance. Here at Gener8 Finance, we think that this is a particularly unusual statistic. Why is it that growing companies continue to overlook the benefits of invoice finance and discounting services in favour of far less practical financial solutions? We’ve come to the conclusion that the answer must be misinformation: UK businesses are simply unaware of the advantages that invoice financing can offer over alternative solutions. In response we thought we’d compare and contrast invoice finance with the current most popular technique, relying on overdrafts instead.
Fees and interest
When you use an invoice discounting or financing service, you will be asked to pay the company’s service fee as well as a cost of borrowing known as discount charges. The service fee may be quoted as a percentage of your annual turnover (typically somewhere between 0.5% and 3%), or may be a fixed monthly fee depending on the size and type of facility you have, which will affect the cost of running your account. With a business overdraft, on the other hand, you’ll need to pay an upfront ‘arrangement fee’ – usually in excess of 1.5% of the overdraft facility limit agreed, with additional fees at renewal or increase of the facility, which may be a percentage or a fixed rate. As with discount charges, overdrafts are subject to interest rates depending on the amount borrowed, though overdraft interest rates are often higher than the discount rates charged by invoice finance companies.
Availability of funds
One of the main reasons that invoice finance and discounting services have grown in popularity of late is down to their flexibility. Invoice financing facilities can be tailored to suit individual clients, and usually raise around 85% of a company’s ledger finance. Growing the facility in line with increased ledger values is typically much simpler to organise, depending on your specific arrangement, your provider, and the amount you draw down each month. By contrast, overdrafts typically come with fixed funding limits; increasing these requires reassessment and re-approval, which will typically take longer to organise, whilst informal overdrafts (those not preapproved) are subject to relatively high fees. If you’re looking for an injection of capital to help you ride out a rough patch or kick-start business expansion, invoice finance and discounting is the far more practical solution.
Typically, overdrafts are arranged based on the credit history of the borrower. With invoice finance, it is typically the credit of the debtors on your sales ledger that is of greater importance. For large values, invoice finance providers may seek secondary security in the form of unsupported personal guarantees from directors up to an agreed value. In comparison, large overdrafts may require a secondary supported personal guarantee, held against specific assets. The difference between the approaches will have an impact upon your personal liability, and can affect how long it takes for your funding application to be approved.
Sadly, many of Britain’s SMEs are still misinformed when it comes to invoice financing, believing that it’s well suited to struggling businesses but not rapidly expanding companies. In actual fact, invoice finance and discounting services could be the perfect financial solution to as many as 500,000 UK businesses, according to industry sources. Regardless of whether you need financial help to ride out a rough patch caused by late-paying clients or are looking for funds to help grow and expand your business, invoice finance and discounting could be the best solution for your company. Contact us to find out how our services could be used to help your business, or take a look at our invoice finance and credit management services online for more information.
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