The Disadvantages Of Bank Overdraft For New Start Up Businesses And The Alternative

This article is aimed at new start up businesses that are looking for finance. It discusses some of the disadvantages of bank overdraft when used to fund new start companies and an alternative source of finance for start-ups such as invoice finance for startups.

When we surveyed 100 new start businesses we asked them about the sources of finance that they used to fund their new start up.

Funding A New Business

52% of the new starts said that they had used bank overdraft as a source of finance. This suggests that bank overdraft is the obvious source of finance that new start businesses turn to. However, 44% of those went on to say that their overdraft was inadequate for their working capital needs and so they were short of funding. In every one of those cases the new start up business told us that the issue was that their bank was not prepared to lend enough money to meet their funding needs. So although over half of new starts use bank overdraft, almost half of those then experience funding restrictions.

This limiitation in bank overdraft funding led to a variety of undesirable consequences for those new start businesses:

  • 39% couldn't grow or experienced slow growth
  • 26% struggled with cash flow
  • 13% couldn't pay their employees
  • 9% couldn't pay the tax man
  • 4% were living off their savings
  • 4% had to close their business
  • 4% said they were "stuck"

So bank overdraft proved restrictive for nearly half of the new businesses that used it to fund their start up - a worrying statistic that it would be wise for new businesses to note.

There is an alternative. Invoice Finance releases the cash that is tied up in the unpaid sales invoices of a business. It is freely available to new start businesses and qualification depends upon the quality of the debts (if they are simple in nature, to good quality debtors) rather than the financial strength of the business - a big advantage for new start up businesses that can be finacially weak. Even if you have been turned down for a bank overdraft or if you have adverse personal credit history you may still qualify for invoice finance.

In our survey invoice finance was the little known alternative option for new start businesses but our survey confirmed that those that did use invoice finance had no funding restrictions and felt they had all the finance the would need to fund their new start business. So before committing to bank overdraft finance or if you have been turned down for a bank overdraft you should consider the benefits of a more flexible form of finance that is highly suited to financing new start ups.

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