Many of us are familiar with overdrafts as it is one of the few funding options open to both personal and business finance. Although the basic concept remains the same – you are borrowing from your bank once your current account has run out.
When seeking an overdraft facility from a bank, small and medium-sized enterprises (SMEs) are required to provide a lot of information. The bank manager will inquire about the purpose of the funds, the potential risks, and the methods for managing them. The bank expects the SME to provide a comprehensive business plan, including financial forecasts such as profit and loss statements, balance sheets, and cash flow projections. Even with all the effort and preparation, the bank may still reject the SME’s application, putting them in a difficult position.
Furthermore, the bank imposes several expenses on the SME for the use of an overdraft facility. The bank charges an arrangement fee to set up the facility, and applies interest charges on a daily basis for overdrawn funds. The bank will charge an additional arrangement fee each time they renew the facility. This can accumulate over time and cause further financial strain.
What makes a good alternative to an overdraft?
Selective Invoice Finance (SIF) may be a viable alternative for SMEs to a bank overdraft. The company can use SIF on an as-needed basis to meet their working capital requirements since it is a flexible option. Rather than requiring a comprehensive business plan and financial projections, SIF is more focused on the invoice as collateral. This enables the SME to access funds quickly and efficiently, with lower interest rates and no arrangement fees.
SIF is especially beneficial for SMEs who are in the early stages of development or have a low credit score. Because it is more flexible and less rigorous than bank overdrafts, SIF can provide a practical solution for SMEs that require funding but are unable to meet the strict requirements of traditional bank loans.
In conclusion, obtaining a bank overdraft can be a challenging and expensive process for SMEs. The strict requirements associated with bank overdrafts can make it difficult for small businesses to obtain the necessary funds. As a result, SIF can provide a more flexible and accessible solution that allows SMEs to manage their working capital requirements.
Get in touch with us at Funding Bay for your business financing needs.
