Invoice finance or a business overdraft?

Key points

• Both can help a business when money comes in later than it goes out.
• Invoice finance is tied to your unpaid invoices. An overdraft is a limit on your bank account.
• They are priced differently, so compare the total cost using your own quotes.
• The right fit depends on your business, your customers and how often the gap happens.

The cash-flow gap

Many businesses do the work, send the invoice and then wait to be paid. Meanwhile, wages, rent and suppliers still need paying. That gap between money out and money in is where these two options come in.

The invoice ageing helper can show how much is owed to you and for how long. That is a useful first step.

What is invoice finance?

Invoice finance lets you get cash now against invoices your customers have not paid yet. A provider advances part of the invoice value. When the customer pays, you get the rest, less the provider's fees.

The amount available tends to grow as your sales grow, because it is linked to your invoices. Read How invoice finance works for more detail.

What is a business overdraft?

An overdraft lets your business account go below zero, up to an agreed limit. You draw on it when you need to and pay it back as money comes in. Interest is usually charged on the amount you are using, and there may be a fee for having the limit.

A line of credit works in a similar way. The line of credit estimator can help you think about costs.

How they differ

What it is based on

Invoice finance is based on your unpaid invoices and the customers who owe them. An overdraft is based more on the business as a whole: its cash flow, history and any security offered.

How the limit works

With invoice finance, the amount you can draw usually moves with your invoices. An overdraft has a set limit that is reviewed from time to time.

Who your customers deal with

With some invoice finance, the provider collects payment from your customers. With others, you keep collecting. With an overdraft, your customers do not notice anything different.

How it is priced

Invoice finance often has a service fee plus a discount or interest charge. Overdrafts usually charge interest on the balance used, and may have a limit or account fee. Because the pricing is different, compare the total cost, not one number.

Questions to ask yourself

• Do you sell to other businesses on payment terms? Invoice finance usually needs business customers.
• Is the gap regular (every month) or occasional (once or twice a year)?
• Are you comfortable with a provider contacting your customers?
• Do you have assets you could offer as security?
• How much paperwork can you handle each month?

Run the numbers

The invoice finance calculator shows the cash now, the cash later and the cost of an invoice, using the advance and fee from your own quote.

The overdraft vs term loan tool compares an overdraft with a fixed loan, so you can see how interest adds up over time.

You can also look at the cash flow planner to see when the gaps happen and how big they are.

Other options

Sometimes the answer is not finance at all. Shorter payment terms, deposits, earlier invoicing or chasing late payers can all help. It is worth checking these first.