Times of financial hardship and poor cash flow can be incredibly stressful as is but add to that the complexity of finding the right solution and you can be in quite a pickle. We are here to break down the key differences between two common forms of funding; cash flow financing and bank overdrafts, so you can make the right decision for your business.
Bank Overdrafts
A bank overdraft is a line of credit that allows you to continue making transactions even after your account balance has dropped below zero. This form of funding is linked to your regular bank account.
Advantages
Bank overdrafts provide financial cover for
periods where incoming and outgoing funds are mistimed. This helps to ensure
businesses maintain steady cash flow, which is essential to float operations.
Another benefit of overdrafts is that they help to avoid late payment fees and
penalties. As long as they do not exceed the overdraft limit, automatic
payments and cheques will continue to clear, despite insufficient funds.
Disadvantages
Although terms will vary between banks,
overdrafts generally have strict credit limits and require property as
security. In addition to this, although interest charges are only applicable to
the overdrawn amount, it is usually at a much higher rate than other loan
options.
One of the most critical differences between overdrafts and invoice financing is that overdrafts can encourage a relaxed approach to debt collection. As the overdraft debtor has quick and easy access to additional funds, it can create a bad habit of accessing high-interest finance instead of placing additional efforts into chasing clients for payment. Therefore, it could be considered a ‘bandaid fix’.
In contrast, invoice financing allows businesses to access cash tied up in unpaid customer invoices. The invoices themselves act as security and no additional collateral is required. This form of funding drastically reduces the risk of overspending as the available finance is limited to the invoice amount (fewer set fees and charges). This provides businesses with an arrangement that is flexible, encourages growth and provides critical cash flow in a way that ensures the business does not over-extend itself.
To learn more about invoice financing and how it can help you, contact our friendly team today!
References
- Westpac.
‘What Is An Overdraft?’, Westpac, Online, [No Date], https://www.westpac.com.au/personal-banking/personal-loans/overdrafts/definition/
(Accessed 4 November 2022)
- Finance
Management. ‘Advantages and Disadvantages of Bank Overdraft’,
Finance Management, Online, [No Date], https://efinancemanagement.com/working-capital-financing/advantages-and-disadvantages-of-bank-overdraft
(Accessed 4 November 2022)