7 Alternatives if Your Bank Withdraws Your Business Overdraft
Conrad Frod looks list seven finance options if your bank removes or reduces your business overdraft...
Overdrafts can be extremely useful for managing cashflow, especially for businesses with uncertain or seasonal trading. Unfortunately, over the last few years there has been pressure on traditional bank overdrafts that will only get worse, leading to strong demand for alternative finance options.
Luckily, alternatives are emerging, but with a wide variety of lenders and finance types it is difficult to know where to go next. Here, Conrad Ford of Funding Options gives seven sources of alternative finance if your bank removes or reduces your business overdraft.
Finance your invoices
For businesses looking to expand, invoice finance helps you to grow with less risk and is a good option for businesses with unpaid invoices who need to access capital quickly. Many providers will make you commit to a deal for at least a minimum of a year so ensure you choose wisely. There are a number of distinct types of invoice finance, but the most common are ‘factoring’ and ‘discounting’; in some circumstances you can raise finance against single invoices, which is a really flexible option.
Although often expensive, short term loans provide a fast and flexible injection of cash when you most need it, such as for equipment repairs or a large order. Beneficial for seasonal businesses or to support rapid growth, short-term loans can be the best option at the most crucial times.
The basic concept is that retailers and other businesses with card terminals can get a cash advance, usually between £10,000 and £100,000, which is repaid through a proportion of sales that are completed with card payments. The percentage that you will pay back via each sale is decided between the business and lender but typically it will be around 20% of the value of each card transaction. Although a very predictable and flexible way of raising finance, explore your options as some providers require you to change your card terminal provider, which is painful.
Stock or trade finance
When trading from abroad, stock or trade finance can be useful to fund your inventory through to sale. Trade finance allows the upfront payment to your supplier for goods against a confirmed order from your customer and stock finance provides a facility that is linked to value of your inventory, whether this is in the form of raw materials or finished products. Like invoice finance the terms are often complex, so it’s a good idea to get expert help.
Leasing back your assets
Low on cash, but asset rich? By refinancing assets such as machinery, vehicles and equipment you can retain their use whilst releasing working capital. This form of finance can often be put in place surprisingly quickly. Leasing usually involves monthly payments and contracts can run for any length of time from a month to a year. Factors to consider are out-dated assets and service costs that occur.
Releasing property equity
Much like leasing back your assets, if you own property then the equity can be used to raise business finance, often at short notice. The two main types of equity release schemes are property reversion and a mortgage. With a property reversion you sell all or part of your property to a specialist company but continue to stay there as a tenant of the company, paying little or no rent. Your home is sold when you leave it. With a mortgage you take out a loan against your property which will be repaid from the proceeds of sale when you leave it or which you can pay off gradually. With complex terms, differing repayment schedules, and varying ‘loan-to-value’ ratios available, it is important to get expert advice.
New lenders offering a similar solution to bank overdrafts are now emerging, for example supporting firms needing ongoing access to £50,000-£100,000 of working capital. These new products are typically only open to businesses with good credit history, or with robust plans and forecasts. Some examples of other types of credit services are revolving credit, committed facilities, letters of credit and retail credit accounts.
As terms vary widely for alternative finance, and financing products can often be used in conjunction with each other, expert help is valuable, especially when it comes to costs, risks and eligibility.
Conrad Ford is the managing director of Funding Options, a free Finance Finder service to match firms withalternative finance products and providers