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Debtor Financing v. Overdrafts

Small companies that experience short-term cash flow problems often have few alternatives. Their available options often include getting funds from investors, a business loan, an overdraft facility or using a debtor financing programme.

In this article, we compare debtor financing to an overdraft facility to help you determine which one is better for your business.

What is debtor financing?

Debtor financing is a type of business financing that helps small companies that have cash flow problems because their clients are paying invoices in net-30 to net-60 days. Debtor financing programmes provide funding using the slow-paying invoices as collateral. This solution improves cash flow and provides the business with funds to pay business expenses.

To learn more about debtor financing, read “What is Debtor Finance?

What is an overdraft?

An overdraft is a bank credit facility that allows you to write cheques or make withdrawals from your account up to a specified limit. Most overdraft facilities have a term length of one year, which can be extended. Additionally, overdraft lines are usually secured by real estate.

Which one is better?

There is no simple answer to this question. The better option depends on the amount of money your business needs, the size of your company, the fluctuations of your cash flow and the collateral you have, among other things.

The following five criteria help you evaluate which solution is better for your business.

1. Collateral

Most overdraft facilities are secured specifically by real estate, often your personal property. To qualify for this type of financing, the business owner – or the company – must own real estate.

Debtor financing facilities, on the other hand, are secured using your invoices from reliable commercial clients. Most debtor financing facilities do not require real estate as collateral and are available to small business owners.

2. Limits and support for growth

Overdraft facilities have a maximum limit which is determined by the value of the real estate collateral. You are not allowed to make withdrawals or write cheques above this limit. Furthermore, the limit remains fixed even if your business grows.

Debtor financing facilities are limited only by your sales, the size of your invoices and the quality of your clients. These facilities can increase as your business grows, provided your invoices remain of high quality.

3. Ease of qualification

Qualifying for an overdraft facility can take some time and is moderately difficult, even if you have collateral. Furthermore, your business needs to have a successful track record. The process can take weeks or months.

Debtor financing facilities are available to small and medium-sized businesses that have limited sales track records. Usually, companies that qualify can receive their first funding in about two weeks. Subsequent invoices are funded in one business day.

4. Financing restricted by sales?

Overdraft facilities allow you to withdraw and use as much money as your limit allows. Debtor finance facilities, on the other hand, can provide financing only up to the amount of the sales you are financing.

5. Costs

Overdraft facilities are usually less expensive than debtor financing facilities. Learn more about invoice factoring costs.

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