Whatever market place a growing business operates in there is always one problem that emerges when a company becomes successful i.e. they all suffer from either cash flow problems or a shortage of working capital. The initial solution that many businesses usually turn to is a bank overdraft and this can meet any cash shortfall at least in the short term, but is it the right finance option for your company? Is a debtor finance option such as factoring better suited to enabling business expansion, here we explore some simple facts about the suitability of both methods in respect of helping a company grow.
The problem with bank overdrafts is simple, the level a bank will set an overdraft limit at will be dictated by a companys’ historical trading data, i.e. previous years turnover & profits etc. using current lending criteria which can change at any time. 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infusion of capital, but how far can a company develop on fixed amount of capital from a finance option that could be withdrawn at any time, even if your business is unaffected by general trading conditions.
An alternative cash flow finance product such as factoring which exploits what for many businesses is a primary asset, i.e. invoiced debts, is a “here and now” commercial loan option that dynamically moves forward with an expanding company. Increased credit sales means more cash tied up with your customers and your sales ledger, those trade debts throttle your cash flow!
Factoring and overdrafts have broadly similar costs in terms of cash, but when a company is faced with cash flow problems which option would your prefer? 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 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!