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Debt free alternative to a business overdraft

Small businesses experiencing cash flow problems should consider alternatives to the traditional overdraft or bank loan to alleviate recurring financial pressure.

Businesses not wishing to add further debt could consider invoice finance as a viable alternative. But what is it and how much will it cost? Here we demystify invoice finance and explain what it is and what you need to know before deciding to apply for invoice finance or a bank overdraft.

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Invoice Finance

Alternative lenders in Ireland which offer Invoice Finance advance the majority of the money owed on the invoice you’ve issued to your customer, minus service fees.

This means you receive the money you’re owed 30 to 90 days before your customer pays. The advantages of this are many – knowing you’ll receive money means you can negotiate better payment terms with your own suppliers, build stronger relationships with your customers and employees, and make plans to market your business.

Using an Invoice Finance provider means you have peace of mind knowing you will receive payment around 24 hours after you issue the invoice.  And the more invoices you issue, the more cash you build, with no further need to negotiate additional payment contracts with the factoring organisation or provide further collateral. Usually invoice finance contracts run annually, but they can be shorter-term.


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Business overdrafts

You apply for a business overdraft through your bank. Essentially an overdraft is a credit facility that allows you to access cash up to a specified account limit.

Most overdrafts run annually meaning you must renegotiate terms with the bank. Additionally, banks usually ask for collateral to secure the overdraft.

And if you go over your agreed overdraft, you’re liable for extra charges and penalties. Overdrafts can also be withdrawn without notice.


Our credit terms often means that we are paying a contractor twice or maybe three times before their client pays them for the first time, we looked at possible financial options including overdrafts to fund the growth of the business and none were suitable until we discovered invoice discounting. GERARD DOYLE, CO-FOUNDER AND MANAGING DIRECTOR RECRUITERS

Differences between invoice finance and business overdrafts

Collateral

With Invoice Finance from alternative lenders in Ireland, your invoice is the collateral. The creditworthiness of your customers is key. An overdraft may require a charge over property or equipment.

Ease of organising

Alternative lenders in Ireland are accessible to even the newest businesses with limited credit history. What’s important when it comes to Invoice Finance is the creditworthiness of your customers and your experience in the industry. Overdrafts can be trickier, even if you have property as collateral. Overdraft providers will generally want to see a good credit history.

Flexibility

Financing more invoices means your access to cash grows exponentially. Once you’ve reached a limit on your overdraft, you have to pay it off or renegotiate. Many banks have strict lending criteria based around credit scores. If you have a bankruptcy in your background, it’s highly likely you’ll be turned down. With Invoice Finance, you may be considered because the organisations take much more into account.

Fees

Overdraft facilities may cost less than invoice finance services on the surface. Overdraft interest is charged at the agreed rate. However, if the overdraft amount exceeds the agreed terms, then charges will be higher and potentially the overdraft will be withdrawn.

Whatever option you choose, invoice finance or business overdraft, ensure you read the small print and understand the process. Generally the process to arrange an invoice finance agreement is faster than arranging an overdraft. Also, ask what other services your financial services provider can offer to help your business expand.


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