Are overdrafts and credit cards the right funding tool?

  • Posted by Andrew Kelly
  • On June 27, 2019

Over the past two or more years the biggest challenge for small to medium businesses is getting enough cash to effectively run the business. It’s not uncommon for a profitable business to have cashflow problems, and this is especially true when new growth and sales opportunities come up. 

There is a growing trend for extended payment times between when the sale is made and when the invoice is paid, according to a Financial Report prepared by the Australian Small Business and Family Enterprise Ombudsman2. The report references research where Australia ranks as the worst country in the world for the time taken to pay, at approximately 27 days late in payments. This is a long way behind Mexico, in second last place who are at about 18 days late in payments. Interestingly, some countries pay early on average, such as Japan where invoices are paid 6.5 days before they are due.

Free eBook - Understand the Business Cashflow Cycle to Finance Your Businessmockupshots-freeimage-mock-00053 (3)

The info-graphic below highlights some key statistics from a range of sources on late payments within Australia. 

Australian Invoice Statistics (5)

Traditionally, businesses have turned to banks for commercial overdrafts, and more recently credit cards for emergency cashflow, to get the cash they need to fund business operations. The overdraft is typically secured by the borrower’s personal real estate, however, since the recent Royal Commission into banking, overdrafts are even harder to procure, and many banks are using their rights under the facility terms to convert some overdrafts into term loans to reduce their perceived risk.

Previously, overdrafts and credit cards have been easy to administer once set up. However, the primary difficulty is the stricter lending criteria of most banks and the requirement to provide property as security, exposing the owner to personal risk.

As a result, a growing number of SMEs are turning to Customer Invoice Finance as an alternative to commercial overdrafts.


Are overdrafts and credit cards the right funding tool?

Customer Invoice Finance is a simple yet effective way of improving cashflow. It offers several advantages over using a commercial overdraft facility.

1.  Real estate is often required for an overdraft

With Customer Invoice Finance, the value of the invoices secures the finance, so real estate assets are not at risk. This also greatly speeds up the setup of a Customer Invoice Finance facility as there is no need for valuations and mortgage documentation processes.


2.  Overdrafts have inflexible limits

An important issue with using a commercial overdraft is that it’s limited by the value of the security provided. This results in a hard and inflexible limit that can’t easily be moved as the business grows. In contrast, customer invoice finance can grow with the business. When sales and receivables increase over time, your business can quickly receive an increase in funds that are needed to finance this growth.

3.  Rigidity

Real estate secured finance can suffer in times where prices are depressed due to a stagnant economy or real estate market and such rigidity can undermine the confidence of owners and directors to make longer term investment decisions, as they are exposed to the fortunes of the real estate market. Instead, Customer Invoice Finance can continue the funding for the business and cash is released in line with the growth of the business so there are no restrictions as the business performs.


4.  Property assets may not be fully utilised

Real estate secured overdrafts will lock up the property usually with a relatively low Loan to Value Ratio (‘LVR’). As Customer Invoice Finance does not require real estate security, property can then be used as security for other uses, for example investment.


5.  Based on historical performance

Approval for an overdraft facility typically includes a close look at your business history. Being a new business or having periods of lower performance or losses in the past are heavy restrictions that could stop a bank from providing ongoing funding. Customer Invoice Finance is based on the value of outstanding invoices. This makes it suitable for new and growing businesses that have increasing sales to good customers but have short trading history.

Customer Invoice Finance is also a lot more flexible in terms of its criteria and looks more closely at the value of the customer relationships and invoices because the simplicity of the business being only about the balance sheet and profit and loss can undermine the true value of the business.


6.  Paperwork

The long and complex process of applying for an overdraft is both confusing and slow. Customer Invoice Finance has a different approach. AddCash Finance conduct a review of the business, including the receivables system, funding required, and the creditworthiness of the client and debtors, and tailor a solution for your business. If you accept the offer, the legal documents are drawn up whilst the facility is set up, and when these are signed and completed the funds start to roll.

The importance of cashflow for long-term business viability is often summarised by the saying “Cash is King”. In the past, most businesses with cashflow challenges would use a business overdraft facility. Today, with its many advantages, more businesses are turning to Customer Invoice Finance and most importantly the stress of customers always paying late is managed so you can focus on the growth of your business.

Business Cashflow Cycle Download

AddCash Finance is a specialist when it comes to Customer Invoice Finance. We work to provide solutions for all businesses rather than focus exclusively on those who can offer bricks and mortar security and have consistent financial results. We encourage young and new business owners to partner with us so they can access finance that allows them scale based on their talent and not unrelated property valuations. Contact us today.