Traditionally, every company had a business overdraft and many saw it as the borrowing facility of first resort when a customer paid late or a bill arrived early. The sheer flexibility of being able to borrow and pay back at will with a business overdraft outweighed the high interest rate and sometimes the high arrangement and maintenance fees, creating a win-win situation for banks and their business customers alike. However, the business overdraft’s days may be numbered.
Are business overdrafts becoming extinct?
Recent research shows that business overdrafts are becoming an endangered species: in fact, companies in the UK are having their limits reduced or their facilities removed altogether at a rate of £5.7 million a day. 17% of SMEs responding to a survey stated their overdrafts had been cancelled completely, whilst 30% indicated that they had seen reductions in their limits over the last two years. According to data from the Bank of England, this has all added up to the removal of £5 billion in SME overdraft facilities since 2011.
What’s more, the pain has not been shared equally across the UK, with a stark north/south divide emerging. Worryingly, SMEs in the north are losing their business overdrafts at more than twice the rate of their London counterparts, with a staggering 55% of northern businesses stating their overdraft facility had been removed or eliminated, compared to just 25% of those in London. Many of these reductions will have been achieved by stealth, occurring during busy, cash-rich periods for businesses with seasonal turnovers. At the time, the change may have been barely noticeable, but will have become readily apparent during quiet periods when borrowing from your business overdraft is actually needed.
How alternative finance can help
Thankfully, banks do not represent the only kind of lender in town, and a business overdraft is not the only way to achieve flexible borrowing. An alternative lender can make all the difference when times are tough and your bank isn’t willing to help out, and as the name suggests these lenders apply very different criteria when assessing borrowers.
With an emergency business loan, you could have the funds you need inside your account in under 24 hours, providing an effective alternative to a business overdraft. Alternatively, for a longer-term solution you could consider asset-based finance, whereby you borrow against the value of your premises, plant or equipment. Because this finance is secured on an asset, you can generally expect a lower interest rate than for a business overdraft, as well as the option of a short or long repayment period.
Invoice finance: your business overdraft cash flow problems solved
However, many businesses find invoice factoring and discounting by far the most useful solution. Unlike a business overdraft, invoice factoring and discounting don’t simply remedy the effects of late-paying customers, but can effectively cure the problem. Here’s how it works.
As soon as you issue a customer invoice, the finance company will lend you the bulk of its value – typically up to around 85%. Clearly you will pay interest on the outstanding loan, as well as some fees, with repayment being made when your customer pays you. With invoice discounting, you retain control of your own debtor ledger and pursue your own customers for payment. With factoring, you pass the invoices over to the finance company, and they assign experienced credit control professionals to ensure early payment of the debt.
Some companies prefer invoice discounting as they do not wish their customers to be contacted by a third party; others opt for factoring as they recognise that a dedicated credit control team is more likely to secure rapid payment and thus reduce their interest charges. The choice will depend on the strength of your credit control team and the relationships you have with your customers.
The end of business overdrafts needn’t mean the end of your business
As can be seen from recent research, business overdrafts are becoming a thing of the past for many businesses. However, this need not jeopardise your business – with an alternative lender you can go from strength to strength and continue to thrive in even the most difficult commercial climate.