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Should I use factoring or a bank overdraft?

Making your choice
Answer

Business owners around the world haven’t failed to notice that banks have become more and more reluctant to offer credit facilities, while their lending criteria are increasingly rigid. Therefore, finding alternative modes of finance has become every company manager’s concern. While the traditional bank overdraft is still the choice of many businesses, factoring has become in recent years a sensible, cost-effective option.

 

The principle of a bank overdraft is quite easy to comprehend. It is an arrangement where the bank allows a business to continue to withdraw money, up to a set limit, even if the account has no funds in it. The sized of an overdraft depends on the business’ capital, so it needs to be renegotiated often as the company grows. Besides, overdraft security often consists in property or machinery, and overdrafts can be withdrawn or cancelled at short notice on the bank’s sole decision. The overdraft’s limit is always function of the company’s past financial history, which tends to exclude start-ups or new businesses from the facility.

 

Factoring is much more flexible and accessible. Once the factor has bought the company’s receivables, it can advance the money within a few days, sometimes within 24 hours. This means working capital becomes available quickly, giving small businesses the opportunity to develop quickly. Factoring grows with your sales, so it doesn’t need to be renegotiated, and factors often provide other services such as credit control, or insurance against the risk of non-payment due to a customer’s insolvency. With a bank overdraft, if a customer doesn’t pay you’re liable for the debt. 

 

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An additional question: Respond to this Question

  • Are there any risks or inconveniences to factoring?
  • What criteria should I consider before choosing a factor?
  • How do I assess the quality of factoring companies?
  • Must I work with a factor in my location or can I work with one in another city?
  • When does it make sense to use invoice discounting rather than factoring?
  • Who are the major UK factoring companies?