Overdraft vs invoice finance comparison: Which is better for your business?

invoice finance comparison

Business overdrafts are a complex, time-consuming and limiting form of finance – is there a better way?


Whether you’re a small start-up or a more established SME, it’s likely you’ll need finance at some point in your business’ life cycle. When it comes to bridging the cash flow gap, investing in assets to grow, or simply paying the bills, finance offers big benefits for business.

So what kind of finance is right for you? To help you find out, we’re taking a look at one of the most effective – yet often overlooked – ways of financing your business. It’s called invoice finance.

But what is it, and what can it offer your business? And more importantly, how does it compare to more traditional forms of finance, such as the overdraft? Let’s take a look.

overdraft vs invoice finance comparison

Invoice finance lets you free up cash from unpaid invoices


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Overdraft vs invoice finance comparison

MetricOverdraftInvoice finance
CostFees are lower, but often hidden and unclear. A fixed interest rate usually applies.The fee structure is easy to understand, and you’ll only pay interest on what you need.
FlexibilityRepayment schedule is often rigid, with strict terms and conditions.Choose the invoices you want finance for, and get funding as often – or as rarely – as you need.
AvailabilityHarder to get if you’re a startup, or have bad credit.Funds a wide range of businesses.
SpeedApplication process is lengthy, and it can take a while to be approved.Apply online in less than 30 minutes, and receive funds within 24 hours of raising an invoice.
GrowthThe funding limit is fixed, and re-application is difficult.The funding limit grows as your business does.
SecurityCan be withdrawn by the bank in a matter of days.Deals cover a span of months, or even years.
Customer supportContact centre-based, often with long wait times to speak to an actual person.Dedicated account manager and companies offering industry-specific knowledge.

What is invoice finance?

Invoice finance is a form of funding for businesses. Invoice finance is when a company sells one or more of its unpaid invoices to a third party (the factor).

The company enters into an agreement with a factor, which then pays up a large portion of the invoice’s value (generally around 85-90%), providing a quick cash injection for the company. In most cases, the factor will also take responsibility for chasing the payment of the unpaid invoice, too.

When that invoice is later paid in full, the factor takes a small fee, before releasing the remaining value of the invoice to the company.

Invoice finance is a collective term that includes invoice factoring, invoice discounting, and selective invoice finance.

What is a business overdraft?

Overdrafts aren’t just a staple for uni students – they’re actually one of the most common forms of funding for UK businesses, too.

An overdraft is a credit limit your business agrees with the bank. When your account balance dips below zero, extra money becomes available. It can be a handy safety net for businesses without consistent cash flow – but using it has its drawbacks, too.

How is invoice finance different to an overdraft?

So, you ask – what’s the difference between invoice finance and more common forms of funding for businesses?

The key difference here is that invoice finance is based on the invoices you raise. That makes it a form of borrowing that grows with your business. It also means that, because it’s tied to money that you’ve already invoiced for, there’s less worry about how you’ll be able to pay back what you borrow.

An overdraft, on the other hand, comes with high interest rates and hidden fees. This means that, rather than growing with your business, it can drag you down into a (gulp!) cycle of debt. This makes overdrafts harder to pay off in the long run, and means they can stunt the growth of your business.

So, why is invoice finance so useful for small businesses? Let’s dig deeper.


Business overdraft vs invoice finance comparison

We put these two funding options head to head – comparing them on a range of metrics to find out which one is better for your business. Here’s what we found.

Security

Invoice finance deals are usually agreed on a longer, fixed-term basis – typically for several months, or even years. This helps you secure your business’ future, because you know you have a reliable, ongoing source of funding to ease any cash shortfalls.

An overdraft, however, can be withdrawn by the bank at any time. Should it feel the need to, the bank can exercise its right to pull the funding rug from beneath your feet, and demand full, immediate payment of the overdraft.


Key takeaway: An overdraft puts your business’ future in the bank’s hands. With invoice finance, you’ll get the security of a long-term deal.

Customer support

Remember the last time you were stuck on hold on the phone to the bank, being serenaded by tinny piano music? So do we. Overdrafts often come with limited customer support, and it can be hard to get through to someone with any knowledge of your business’ situation.

Invoice finance companies, by contrast, offer advice and dedicated customer support. There’s also a range of invoice finance providers with tailored solutions for industries like recruitment and construction.

Sound good? Check out our list of the top 10 invoice financing companies in the UK to find out more. Or, take 30 seconds to fill out our free quote-finding form, and start comparing quotes from top UK invoice finance suppliers.

Key takeaway: The range of invoice finance companies in the UK means you can find one that brings quality customer support and industry-specific knowledge to your business.

Growth

With invoice finance, the funding limits grow with your turnover. So the more you’re making, the more finance you receive. This isn’t always the same for overdrafts, the limits on which usually remain static.

Reapplying for a larger overdraft is often a complex and time-consuming process. As such, an overdraft isn’t suited to more ambitious businesses that are looking to grow.

Key takeaway: Invoice finance scales with your business, and helps fuel growth – fast.

Flexibility

Depending on the type of invoice finance you choose, you can opt to get funding for as many – or as few- invoices as you want. As the name suggests, selective invoice finance lets you pick and choose which invoices you want funding for.

By selling just one, or a select few, of your invoices (rather than your whole ledger), you’ll stay in control of your business. It’s one of the most dynamic, flexible forms of finance available today, and we reckon it beats being constantly stuck in an overdraft!

Key takeaway: Invoice finance is a versatile form of funding that lets you stay in control of your sales ledger.

Speed

Invoice finance is quick. You should receive up to 90% of your invoice’s value within 24 hours, meaning there are no long, frustrating waiting periods for cash. With some invoice finance providers, you can apply in as little as 15 minutes, and be all set up within a couple of days.

Applying for (or extending) an overdraft, however, can be a snail-like process full of red tape and strict conditions. You’re also likely to have to provide some form of collateral, which slows everything down even more – and makes invoice finance that much more of a tasty proposition.

Key takeaway: Invoice finance is quicker to apply for and set up – and you’ll usually see the money within 24 hours.

Availability

Let’s not sugarcoat it – if you’ve got a bad credit rating or have struggled with collecting debts in the past, it’s going to be tough to get funding. Even small businesses and startups with clean records can struggle to get accepted for overdrafts.

That’s where invoice finance can help. Usually, invoice finance companies will take control of the debt for you, meaning they’ll chase up the client and ensure payment is made. Invoice finance lenders look at your customers’ credit rating, rather than your own – making them a better choice for higher-risk businesses.


The one drawback? Only commercial invoices can be financed. If you’re in business-to-business (B2B), that’s fine – but if you deal mainly in selling to the public, then an overdraft might be the better bet.

Key takeaway: Invoice finance is better for startups or businesses with bad credit, but an overdraft is more well-suited to business-to-consumer (B2C) companies.

Cost

The credit control service you get with invoice finance does make it the slightly more expensive option. However, the costs involved with invoice finance are more transparent, and easier to understand. Plus, overdrafts only offer lower fees if you stay within the agreed credit limit.

That’s right – if you overspend at any time, you could face interest rates of up to a whopping 30%. Which, when you compare, isn’t cheaper at all!

Key takeaway: Overdrafts offer lower fees – providing you stay within the limit.

Expert verdict

When our in-house team of experts began putting together this invoice finance comparison guide, we were expecting it to be more of a fair fight. Overdrafts are such a common, popular form of business finance – how could they lose?

Well, they can – and they did. Invoice finance is a simpler, quicker, and more flexible finance solution for UK businesses. It’s more sustainable, easier to set up, and – most importantly – it grows with your business.


Next steps

Now you’re here, why not find out a bit more about what invoice finance can do for you? Our handy webform lets you compare quote from UK invoice finance companies, all for free. What’s more, it takes thirty seconds – so save yourself some hassle, and let us match you with the right supplier.

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