Finance August 25, 2014 Last updated September 18th, 2018 891 Reads share

4 Alternatives To Overdrafts For SMEs

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Routinely using an overdraft can seem like an unavoidable option as far as many small businesses are concerned. However, there are alternatives if you’re worried by the costs or potential consequences associated with an overdraft.

Here’s 4 of the best:

#1. Asset finance

Rather than dipping into an overdraft facility to cover payments associated with large purchases, small businesses can establish structured repayment plans to secure access to assets they need.

The process is not unlike leasing but usually means that the company making payments takes ownership of the relevant assets after a specified period of time. This option helps businesses ease their cash flow concerns while ensuring that they can benefit from using equipment or assets that support their progress and profit-making capacity.

#2. Asset refinancing

If your company continually uses or overstretches its overdraft facility and has capital tied up in valuable assets, such as a fleet of vehicles or heavy machinery, then asset refinancing can free up cash quickly.

The process essentially involves a company selling its assets and leasing them back at an agreed rate, which might seem like a drastic measure but if cash flow issues are causing serious financial problems then refinancing can be a positive and sensible way forward.

#3. Invoice factoring and discounting

Another way in which small businesses might look to leverage their assets to raise funds for the short term is through what are termed invoice factoring and invoice discounting.

Both processes are based on the idea of a company selling its rights to monies owed by a third party business or organisation in relation to a particular invoice. In the case of factoring, the purchaser of those rights takes on the responsibility of securing payment from the relevant third party, while with discounting the issuer of the invoice retains that responsibility.

In each case, the process means that a company can access funding more quickly than they otherwise might and therefore they can ease their cash flow concerns and potentially their reliance on overdraft facilities.

#4. Short term loans

There are any number of instances in which a small company decides that the use of an overdraft facility is the best way to overcome short-term cash flow problems or to make specific payments to creditors. However, it is also worth considering whether taking on a short term loan might be a cheaper and more appropriate way to deal with a particular set of financial pressures.

There are reputable and reliable lenders around that specialise in providing short term loans to companies who need quick access to fresh finance. The process isn’t without it potential pitfalls but with the right sort of planning and management, short term loans can make a positive difference to an SME’s finances.

Getting the right advice

Cash flow problems don’t only affect small businesses and it’s worth remembering that companies of any size can find themselves struggling to keep their finances in full working order. For smaller operators though, financial difficulties can all too easily spiral out of control and prove insurmountable. In this context, the key to using alternative finance options appropriately is seeking out the advice of respected experts and specialists in the field.

Images: ”Business People Arms Raised and Holding the Word FinanceShutterstock.com

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Emily Trant

Emily Trant

Emily Trant is Managing Director of Check Business, a technology start-up that helps SMEs solve the key business challenges of: getting paid, finding new customers, and raising finance. Emily has a successful track record of delivering growth and innovation in digital businesses, and loves getting under the skin of small business challenges. Originally from Canada, Emily has a degree in Economics from the University of British Columbia.

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