Setting up a new business doesn’t come without its difficulties – and staying on top of things financially is often the largest difficulty of all. In the past, ensuring that your business bank account was fitted with a business overdraft was the most common form of secondary funding, meaning that any cash flow issues that you may well experience could be overcome without having to turn down business opportunities.
The overdraft would provide you with respite for days or weeks until any backed up invoices you were awaiting had cleared. Unfortunately, banks are less inclined to offer these safety nets to their small business customers as a result of the credit crunch so finding an alternative solution may be something you need to do if you have cash flow problems.
What are the alternatives to business overdrafts?
Finding an alternative to a business overdraft should still be something you consider carefully, ensuring that you get the right deal for you. Different businesses have different financial requirements and consequently, what is right for one business may well be the wrong choice for another.
Considering exactly what it is you’re looking for, how long you think you’ll need the money for and the amount that you need to ensure that your business can keep trading is important. With this in mind, there are a number of different things you can consider to tackle any difficult months your business might face.
Merchant cash advances
If your customers usually make their payments via card machine, then a service such as a merchant cash advance may be an alternative to consider when moving away from a business overdraft. While not technically a loan, they work in a similar way – the amount you are able to borrow depends on the card sales you are going to make in the future.
The lender communicates directly with your card payments provider and uses the information that the provider gives them to agree on an advanced loan amount. You are therefore aware of the advanced upfront cost, and flexible repayments means that each consequent card payment that you receive from your customers contributes a certain percentage towards your repayments.
The amount repaid depends on the terms of your agreement with the lender. Such a service may well be for you if your revenue is quite unpredictable – meaning that you only pay back what you can afford, and you aren’t left with spiralling debts.
Overpayments on merchant cash advances can be agreed, giving you a little bit of financial respite if you have an unexpected bill – if you can afford to pay more than you have borrowed, this may well be of benefit to you.
Revolving credit facilities
Revolving credit facilities are essentially rolling agreements with a lender and are the closest thing to an overdraft facility on offer to small businesses. You are able to take out a pre-approved credit limit, and you can withdraw funds as you would with an overdraft up to your limit. Some revolving credit facilities allow you to have a card, making withdrawing money an incredibly easy feat.
Withdrawing money requires money to be paid back, and once this has happened, you are able to withdraw additional funds. As this type of agreement is usually a short-term one, revolving credit facilities are normally the best course of action for businesses who usually would struggle to acquire credit – as an unsecured loan; lenders will focus on your trading history and your revenues.
Revolving credit facilities are a flexible lending option, best suited to those growing businesses who may well need to dip in and out of an overdraft-style pot. Bear in mind that the interest rate can be quite high, higher than a traditional loan, so this should be considered when managing repayments.
Invoice finance services
If your clients pay you through invoices, then an invoice finance service may well be the best credit option. Instead of waiting for your clients to settle your invoice, you can sell the invoices to a particular lender who will give you an advance on the amount you are owed.
Once the invoices have been settled, the rest of the money, minus a fee charged by the lender will be given to you – giving you the security of an advanced loan on your earnings in an affordable way. Depending on the type of invoice finance service you take out. There are both invoice factoring and invoice discounting services available to small businesses. The difference largely depends on the role the lender plays in chasing up invoices and how transparent the loan is to your clients.
If you don’t want your customers to be aware of the fact that you are using advanced payment options such as an invoice finance service, then invoice discounting is likely the better option for you. Where factoring is concerned, the lender takes on the role of managing the debt and chases customers on your behalf – on the other hand, invoice discounting leaves you handling your own credit control and invoice settlement; a much more subtle form of borrowing.
Another popular alternaive is to take out a business credit card. Most bank account providers also provide the option to apply for a credit card at the same time. Often, if you are a new business you will receive only a small credit limit until the business credit rating improves overtime. Credit cards are usual for spending smaller amounts and covering business expenses while traveling or entertaining clients etc.