I have been getting asked recently ‘What is the difference between an Invoice Finance Facility and an Overdraft?’
Well, here is the answer. An Overdraft is the most commonly used form of short-term finance, with 16% of SMEs in the UK having one. An overdraft has an arrangement fee to put in into place, you pay interest when you’re using it (no interest when you’re not), and it’s a short-term facility – generally 12 months and renewed at the end of the year.
So if you’re constantly at the limit of your overdraft facility, then there is always the danger that it could be construed as a long-term debt rather than a short-term facility and the bank could ask you to repay that, potentially by putting it into a term loan. At
which point, the benefit of having the overdraft, in terms of no capped repayment requirement and no monthly cost, is superseded because the loan now has a monthly repayment.
The alternative to that, as is often put forward and is a very different kind of facility, is the Invoice Finance Facility.
The Invoice Finance Facility provides you with money upfront on your invoices, before you get paid by your customer.
There is a monthly management fee which needs to be paid on the facility, and you pay interest as and when you are required to borrow money against the invoice. So, if you’re not borrowing against an invoice, then you’re not paying any interest.
I guess the best way to look at it is to compare two companies. So, if we’ve got two companies that are look to grow – company 1 has an overdraft and company 2 has an Invoice Finance Facility.
Now, company 1, when it grows, will grow using its overdraft facility, which is a set amount of money, and it will get to the overdraft limit and find that it starts to run out of cash as it tries to grow through that glass ceiling. So, it will need to go back to the bank and renegotiate the overdraft facility or potentially take out a loan in order to get to the next level of growth.
And then it may use up that finite amount of money as it continues to grow, and once again, it will have to do the same thing again and go back to the bank and try to renegotiate a new deal.
Whereas company 2, they have an Invoice Finance Facility. As they start to grow, they raise more invoices. The invoices then have money provided against them by the lender providing the Invoice Finance Facility which allows them to continue to grow, because the facility grows with them. It’s not the case of needing to renegotiate the facility every time the company grows, or needs more cash.
So an Invoice Finance Facility is a much more powerful way of actually growing your business without having to constantly worrying about reaching a predetermined limit set by the bank.
All that needs to happen is the business keeps growing, keeps selling, and keeps making a profit and the facility will grow with it. It’s a very powerful way of using the cash within a business in order to grow.
I’ve talked a lot about these facilities being very good for the survival of a business, which they absolutely are, but they are also very good for growth. I also think that they are very misunderstood in the market. The reason that I say that is that less than 1% of all UK businesses have an Invoice Finance Facility in place.
If you would like to get in front of other businesses by using an Invoice Finance Facility, if you have any questions, or would like the Financial Health of your business assessed, get in touch today and we can open a conversation.