Overdrafts have traditionally been a flexible and dependable way for businesses to weather the storm and get through tricky periods of bad cashflow. Unfortunately, since the credit crunch the major banks have been greatly restricted in their capacity to lend to small companies, and since 2011, business overdrafts have been reduced or removed by £8.4bn — that’s a rate of £5m per day, every day.
Even more worryingly, the withdrawal of business overdrafts for SMEs has disproportionately affected businesses in the north of the country. While 25% of businesses in London have had their overdraft facilities taken away in the last few years, this situation has affected a staggering 55% of northern firms — so firms in the north are even more desperate to find alternative lines of credit.
The impact on the country at large is concerning too, with a lack of SME lending resulting in an estimated £2.9bn of lost revenues in the last five years. The data has borne out time and again that access to lending drives growth amongst small and medium-sized enterprises — so where can businesses turn if their bank overdraft has been taken away?
Here are five options for businesses looking to replace their bank overdraft:
Merchant cash advances
It doesn’t exactly roll off the tongue, but merchant cash advances are one of the most innovative forms of cashflow finance to emerge in recent years. They’re effectively turnover loans based on card sales: if your revenue is paid via card terminals, you’ll get an advance amount based on your last few trading months.
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Merchant cash advances fit in with your existing terminal provider, and repayments are taken at source as a percentage of monthly sales. That means repayments go up and down, and you’ll pay more in a good month and less in a bad month — perfect for unpredictable businesses in retail and hospitality, or any sector that takes a lot of card payments.
Alternative overdrafts
There are quite a few specialist lenders with products similar to a traditional bank’s business overdraft. Generally you’ll agree a maximum borrowing amount (like an overdraft limit), and then it’s up to you how much you use and when. It’s a good fit for firms who’d rather keep things flexible, because you only pay interest on what you use — but because they’re not tied to any specific asset, you might need to provide some security.
Revenue loans
Turnover loans are based on your recent balance sheets, and you pay back the loan as a percentage of future monthly revenue. Similar to merchant cash advances above minus the card terminal, the main benefit is flexibility — but if your firm hasn’t been trading long, you might not be able to provide enough information for the lenders to agree a loan.
eCommerce loans
Another area of innovation in alternative finance, e-commerce loans are specifically designed for firms that sell products through sites like eBay.
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Smart software scans your payment accounts, and uses real time data to qualify your application immediately. Internet traders can get a quote within minutes and access a line of credit within a day or two, so it’s a great alternative for firms that make a lot of sales online.
Invoice finance
Not so much an alternative product as a traditional product that’s had a bit of an update recently, invoice finance is ideal for firms that trade on credit. If you’ve issued an invoice to a business customer for work you’ve already finished, you can get an advance worth up to 90% of the invoice’s value immediately.
When the customer pays, you get the remainder minus the lender’s fee. Factoring, a subcategory of invoice finance, gets you credit control services too — so instead of chasing up late paying customers, you can focus on what you’ll do with the money.
Conclusion
These are just a few examples of what’s possible with alternative finance nowadays. While it’s unsurprisingly a stressful experience to have a previously reliable business overdraft withdrawn, as you can see, there are plenty of other solutions out there to suit your business.
That, in a nutshell, is the biggest benefit of alternative finance — choice. With so many products on the market these days, you can find the perfect solution for you firm and your requirements, and you might even be suitable for a few different product types.
So remember, alternative finance can help — and the bank’s decision to take away your business overdraft doesn’t necessarily have to put you on the brink.
Conrad Ford is Chief Executive of Funding Options, recently described by the Telegraph as “the matchmaking website for small businesses and lenders”.
Further reading: Alternative finance comes of age
