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Bank Overdraft vs Invoice Finance

Bank Overdraft vs Invoice Finance

You might be considering a form of financing and wondering which is the right fit for your business. In this article, we will be providing an overview of both a bank overdraft and an invoice finance facility as well as its benefits and any drawbacks.

Bank Overdraft

A Bank overdraft (OD) is a line of credit that allows you to continue to make outgoing transactions or withdrawals in the event your business bank account balance drops below zero. It is a temporary loan provided by your bank and usually attracts multiple fees.  This may include an application fee, set-up fee, transaction fees, monthly fees, and interests.

Benefits of an overdraft

An overdraft offers high flexibility as you can tap into funds anytime whilst the facility is in place.  By having an overdraft facility, your business can meet expenses when it falls due within the facility limit.  This keeps your suppliers, employees, and other creditors happy.

Drawbacks of an overdraft

The main drawback is that the interest rate can be very high, similar to credit cards.  Furthermore, the facility credit limit is usually fixed and does not grow with the business.  It often requires security, for example, a fixed and floating charge over your business or a fixed deposit amount securing the overdraft facility.

Invoice finance

Invoice finance is a credit facility that aims to help bridge cash flow gaps. The typical scenario is when your business needs working capital to pay suppliers and expenses whilst waiting to get paid by your customers. This can cause cash flow strains on business.

Invoice finance allows businesses to sell their outstanding customer invoices for a small fee. This way, your business can dictate when to get paid on those invoices and you are able to use the funds where it is most needed. Whether it is to pay suppliers, tax obligations, salaries, CPF, or other operating expenses.

Benefits of invoice finance

Once your invoice finance facility is set up, drawdowns are quick and simple. InvoiceInterchange, your business can receive funds in as little as four hours after submitting an invoice. With our Selective Invoice Finance product, you can choose single or multiple invoices to drawdown on with no contract lock-ins or monthly fees. This gives you flexibility and control over your cash flow.

Another benefit is that an invoice finance facility grows with your business. The larger your accounts receivable, the larger your credit limit.

Drawbacks on invoice finance

Only B2B businesses who sell goods or services to other businesses on credit terms are eligible.  In most cases, only invoices that are issued to credit-worthy customers can be financed.  Hence, it may only be suitable if you have customers that are MNCs, listed companies or government agencies.  It is also not suitable for non-operational purposes like R and D, purchasing property, overseas expansion where a term loan or another finance product might be more suited.

When to choose Overdraft vs Invoice Finance

An overdraft is probably more appropriate for ad hoc requirements.  Invoice finance is more suitable when you have regular cash flow requirements for example paying salaries, CPF, suppliers or operational expenses.

With invoice finance, your business can drawdown up to 90% of your accounts receivable. It is a facility that will grow with your business. The more invoices you have, the more funding you can receive.

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