Home > Factoring, Growing your Business, Small Business Finance, Working Capital > Factoring vs Overdraft? One, Other or Both!
Mar
23
2011

Factoring vs Overdraft? One, Other or Both!

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Creative Commons License photo credit: Skype Nomad

Why choose Factoring if you already have an overdraft?

Every company or business that is growing and on the path to success has faced the same problems regarding cash flow and a general shortage of a working capital.

The first option or most common solution that many small businesses usually turn to its bank for an overdraft (if the bank will give them one). This is usually (but not always) secured against the family home. This can meet a cash shortfall; at least in the short term, but is it the right finance option for your company?

Especially if it is a rapidly growing company?

Is a debtor finance option such as factoring better suited to fueling your business expansion?

Here we explore some simple facts about the suitability of both methods with respect to helping a company or a business grow.

Now, the problem with bank overdrafts is simple, the level a bank will set an overdraft limit at, will be dictated by a company’s historical trading data, i.e. previous years turnover gross profit & net profits using their current lending criteria which can change at any time without notice and is also linked to the hard security that is offered. This is usually the family home.

Without doubt a bank overdraft can provide a useful infusion of capital, but how far can a company develop on fixed amount of capital from a finance option that could be withdrawn at any time (and that does happen), even if your business is unaffected by general trading conditions.

The other option for an alternative cash flow finance product is factoring; which exploits what for many businesses are their primary asset, i.e. invoiced debts! The debtors ledger is a “here and now” asset that can secure a factoring facility that dynamically moves forward with an expanding company. You are limited by your sales NOW; not what happened last year.

Without a debtor finance facility, increased credit sales means more cash tied up with your customer’s unpaid invoices on your sales ledger, those trade debts throttle your cash flow!

Unless they are released, your business growth is slowed.

Both Factoring and overdrafts can have broadly similar costs in terms of cash cost. In many cases factoring will be more expensive but much more flexible in that it grows with your company and your sales and is not constrained by historical trading figures and the stagnant or falling value of a piece of real estate.

When a company or a business is faced with cash flow problems then you should choose the option that suits you best.

Regular trips to the bank spending time re-explaining where your businesses is, negotiating increased credit limits and potentially leaving with insufficient funds to meet your needs and having to do it all again in a few months time, or would you prefer to make the most of your invoiced assets, no continual and repetitive meetings, no time lost, just submit your invoices to your preferred factoring lender, bank your trade debts now and let your business move forward at the pace set by you not someone else!

Think about it!

If you would like more information on factoring and how it might assist you in managing and expanding your business; call Nova Business Finance on 1300 1386 186 or email us at sales@nbf.com.au

posted in Factoring, Growing your Business, Small Business Finance, Working Capital by Small Business Finance News

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