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Invoice example for Facilities

I Graham from play for finance commercial finance broker yeah and I often get asked what is the difference between an invoice finance facility and overdraft well the overdraft is the most common they used for short term finance with 16% of SMEs in the UK having an overdraft and an overdraft effectively there's a rate of 3 to put in place you pay interest when you're using the overdraft but obviously not when you're not using the overdraft and it's a short-term facility so it's generally twelve months due to be reviewed at the end of the year and so if you're constantly at the limit of your overdraft facility then there is always the danger that it could be construed as a long-term debt rather than a short-term facility and the bank could ask you to repay that and potentially by putting it into a term loan at which point the benefit of an overdraft in terms of no capital repayment requirement and no monthly cost is superseded because the loan obviously has a monthly repayment the alternative to that as is often put forward although it is a very different type of facility is the invoice finance facility now the invoice finance facility provides you money upfront on your invoices before you get paid by your customer and there is a fee to be paid on a monthly basis which is the feet and manage the facility and you pay interest as a when you are required to to borrow money so if you're not borrowing money against an invoice then you're not paying interest so I guess the best way to look at it really is to look at two companies so let's say we've got two companies that are looking to grow company one has an overdraft and company 2 has an invoice finance facility now company 1 when it grows will grow using its overdraft facility which is a set amount of money and it'll get to the overdraft limit and find that it starts to run out of cash as it tries to grow through that glass ceiling so it'll need to go back to the bank Andrea go she ate the overdraft facility or potentially take out a loan in order to get to the next level of growth and then it'll use up that finite amount of money again if it's continuing to grow and they'll have to do the same again and go back and try and renegotiate a new deal whereas if you've got the invoice finance facility with company two then company two basically starts to grow and as it grows it raises more invoices the invoices are then there's money provided against that was up front by the invoice buyers facility which allows you to continue to grow because it grows with you it's not the case of having to renegotiate these every single time so it's a much more powerful way of actually growing your business without having to constantly be thinking oh my goodness I've reached under me what do I do now maybe I just stay where I am I'm gonna have to do something to grow again you don't have to think about it you just have to keep selling and keep growing keep making profit and then your facility will grow with you so it's a very powerful way of using your cash in order to grow and I've talked a lot about these facilities being very good for survival which they are but also they're very very good for growth and I think they're very misunderstood in the in the market and the reason I say that is that the only but less than 1% of all UK businesses have such a facility in place and I think a lot of that is to do with the fact that there is this perception that it's well why don't I just use an overdraft instead of an invoice finance facility hopefully I've dispelled that by the company one company to description and but it's it's certainly not widely used facility the stigma that used to be attached to it in terms of people thinking the the company who had one was was in difficulty this is really no longer there and there are lots of finance facilities it's just about just under fifty thousand finance facilities in the UK and so it's being used and being used effectively by many many UK businesses - to hell with cash flow so hopefully that has given you some kind of food for thought really in terms of the question is an invoice finance facility the same as an overdraft or vice versa and hopefully you can see that they are not the same