Factoring Versus a Business OverdraftAug 11 2020 in Invoice Factoring
Cash flow is the lifeblood of a business. Whether you’re a start-up or an enterprise, you cannot thrive without a positive cash flow. But the reality is every business faces cash flow challenges at a certain stage of their business. Whether it’s as a result of a downturn in the economy, seasonal issues beyond your control, unexpected expenses, slow-paying clients, or in the current climate, a pandemic.
In this article, we will examine 2 funding options businesses are using to improve their cash flow, and what to take into account for each.
1. Business overdraft
What is a business overdraft?
A business overdraft is a pre-approved line of credit that allows you to draw more than your available balance. The definition of an overdraft is taking out more than what is in your account. Similar to a credit card or a business loan, interest is charged based on the amount of credit you use.
What fees and charges apply for a business overdraft?
A business overdraft normally comes with an application fee or establishment fee, interest, account keeping fees, and an over-limit fee if you exceed your limit.
Security requirements for a business overdraft
A business bank overdraft can be secured or unsecured. Normally a business overdraft with a limit higher than $50,000 would require security by the banks.
Secured business overdrafts normally require a charge over residential properties, commercial properties, or blanket security over all the company’s assets. The issue here is that when said security is in place, you are fully locked into dealing with that one lender outside of the purchase of further fixed assets. Noting that although potentially being able to purchase fixed assets under a lease, the bank still requires their input as far as annual reviews, etc. to determine ongoing serviceability requirements. Once those fixed assets under finance have been repaid, they fall under the blanket security charge the bank[s] have in place.
What is factoring and how does it work?
Factoring allows you to unlock cash from your accounts receivable and improve your business cash flow. It helps businesses to cover the gap of late payments and provides instant access to funds instead of waiting up to 90 days for their clients to pay. BCashflow Positive factoring can convert your unpaid invoices into cash, in 3 simple steps:
1. Invoice your clients and send BCashflow Positive a copy.
2. BCashflow Positive will advance up to 90% of the invoice value in as quick as 4 hours.
3. We will credit you the remainder less any accrued fees when your client pays us.
How much does BCashflow Positive factoring cost?
BCashflow Positive is transparent about fees, so there are no surprises. We charge 1.8% for the first 30 days, and 0.06% thereafter for up to 90 days. There are no other hidden fees. Give our fee and funding calculator a go to see how much funding you can get, and how much it is going to cost.
Approval and security requirements for BCashflow Positive factoring
Unlike a secured overdraft, where a charge is over residential properties, commercial properties, or blanket security over all the company’s assets, BCashflow Positive factoring only places a charge over the accounts receivable. Factoring gives businesses the freedom to seek other sources of finance, if required, to support their growing business.
BCashflow Positive does not charge an application fee and approval can be in as quick as 24 hours.
What businesses or industries is factoring suitable for?
Since factoring primarily focuses on the quality of your accounts receivable and the paying capacity of your clients, it is very appealing to start-ups or growing companies with a large number of customers on accounts. Factoring is also suitable for industries with long sales cycles such as manufacturing, labour-hire for the health sector, commercial cleaning, business services, and wholesale, to cover the gap of slow payments.
Factoring compared to a business overdraft
A business overdraft is a straight forward loan that has interest and activity fees, its value is that it does not have an end date or repayment schedule. But once the limit has been reached it does not have any flexibilities post that and we have seen many businesses over the years cap out on overdrafts and then nowhere to go. That is when they look for options such as factoring to align the demands of cash flow to the actual liquidity of the business.
Factoring works and does so as it matches like for like. As the business grows so do the sales and the exposure to the factoring company is only ever a percentage of your factored sales at a point in time.
BCashflow Positive factoring allows you to leverage off an untapped asset within the business, the receivables ledger. A funding solution that allows you to release the cash flow that would otherwise be locked up in your unpaid invoices to cover the costs of your next round of new orders waiting to be fulfilled.
When operating successfully within the gross margins set, often a business will offer discounts to customers allowing them to speed up the cash flow cycle enabling them to purchase the stock or employ the staff to cover the next order or generically growing business. The cost is a manageable loss of gross margin to get the cash in. Factoring mimics that process by using a third party like BCashflow Positive to bring forward the sales timeline at a discount. It allows you to leverage off those future invoice payments, so that you can use the released funds to pay suppliers, cover the costs of production to deliver on new orders, and pay wages on time.
Why Factoring with BCashflow Positive?
With three decades of experience, BCashflow Positive has become a leading factoring company in Australia. We want to help small and medium businesses, even start-ups, to thrive and manage their cash flow needs. There are no quarterly audits or intrusive shadow software. We give you the freedom to run your business.
Since factoring is not a loan, industries that are new, growing, or facing cash flow gaps will find factoring to be an attractive option. If you’re an SME looking for a flexible cash flow solution, call 1300 937 292 and speak to one of our factoring experts to fast-track your application.