Overdrafts v invoice finance


Many businesses are still reliant on a bank overdraft as a method of funding. But is this the best option available? Here we compare overdrafts with invoice finance to see which facility comes out on top.


Invoice finance is more flexible than more traditional finance as the cash you can access grows in line with your sales ledger. Also, contracts lasting as little as 30 days are available, or for greater flexibility you can finance one-off invoices on an as-needed basis so you do not have to fund your whole debtor book. In contrast, overdrafts, which are normally reviewed annually, are very rigid as the amount you can access is set at the outset and exceeding this limit will result in charges. Also, the bank has the right to reduce your overdraft or recall it at short notice.


Bank overdrafts are often quick to arrange and once in place they allow you to access money to pay for something when you would otherwise have no money in the bank. Similarly, invoice finance also works quickly and you can access up to 90% of an invoice’s value in just 24 hours, allowing you to bridge the cash flow gap between paying suppliers and receiving payment from your customers.


Credit control can be built into factoring facilities to reduce overheads, while credit protection can also be added. An overdraft meanwhile is simply a method of funding and does not come with any additional expertise.


The bank has the right to ask for repayment of your overdraft at any time which could be damaging to your cash flow if it comes unannounced. And if you don’t use your overdraft it may be reduced at short notice. In contrast, invoice finance solutions cannot be recalled on demand giving you greater peace of mind.


With an overdraft you only borrow what you need at the time which may make it cheaper than other forms of finance. And banks don’t normally charge you for paying off the overdraft earlier than expected. But your bank could charge you if you exceed your overdraft limit without authorisation and if you want to extend your overdraft you usually have to pay an arrangement fee. Invoice finance charges vary based on a variety of factors such as service levels and business size. The discount charge is linked to the amount of money you draw down. In addition to this, there is usually a service or administration fee. When looking at the cost of any finance facility it is prudent to also look at the cash flow benefits and associated savings.


Invoice finance is only available for B2B companies who trade on credit terms and it is better suited to certain industries. You can only get an overdraft from the bank where you maintain your current account.


This largely depends on your business and its needs. When cash flow is tight, overdrafts give businesses a flexible way to manage short-term borrowing. But longer term overdrafts can be damaging to businesses. The interest rate applied is nearly always variable, making it difficult to accurately calculate your borrowing costs which could impact on your cash flow forecasts. Also regularly exceeding your limit can be very costly. In contrast, invoice finance is a flexible facility that can be tailored to your business’s needs. And the amount you can access grows in line with your business, making it more suitable for growing businesses or those requiring a longer-term solution.

If you need help reviewing your existing facility or finding a new funding solution that better suits your business’s needs we can help as an independent finance broker. Contact our team today on 0800 9774833 or email to find out how.


Some of the funders we work with

  • Sonovate
  • Partnership Invoice Finance
  • Team Factors
  • Metro Bank SME Finance
  • Royal Bank of Scotland
  • Haydock Finance Ltd
  • Peak Cashflow
  • Asset Advantage
  • Regency Factors
  • ABN AMRO Commercial Finance
  • Aldermore Invoice Finance
  • Nucleus Commercial Finance
  • iwoca
  • Boost Capital
  • Ultimate Finance Group
  • inFund
  • Time Finance
  • Trade Finance Partners
  • Blazehill Capital
  • Pulse Cashflow Finance
  • MarketFinance
  • Bibby Financial Services
  • Clear Factor
  • Skipton Business Finance
  • Shawbrook Business Credit
  • Secure Trust Bank
  • Close Brothers Invoice Finance
  • Creative Capital
  • MaxCap
  • Lloyds Bank Commercial Finance
  • Merchant Money
  • Woodsford Tradebridge
  • Investec
  • Berkeley Trade Finance Ltd
  • Roma Finance
  • IGF Invoice Finance
  • Barclays
  • InvoCap
  • Accelerated Payments
  • Giant
  • PNC Business Credit
  • 4Syte
  • Optimum Finance
  • FIBR Tech Limited
  • Davenham Asset Finance
  • Leumi ABL
  • Davenham Trade Finance
  • Santander Corporate & Commercial

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We are a credit broker and not a lender and offer credit facilities from a panel of lenders

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