Overdraft Versus Alternative Finance - The Gap Narrows

The gap between usage of bank overdraft and alternative forms of funding, such as invoice finance, appears to be narrowing according to new research. The recent SME Finance Monitor for Q1 2015, produced by BDRC Continental, looked at 5,000 SME businesses in the UK and found that "36% of SMEs reported using external finance in Q1 2015".

The report went on to say: "29% were using one of the "core forms of finance (loans, overdrafts and/or credit cards) and usage has now stabilised, having previously declined . . . Use of other forms of finance (including leasing and invoice finance) was 16% and more variable over time, The gap in usage between the two forms of finance has narrowed over time".

This result should be viewed in the light of an overall decline in the number saying that they use external finance, from an average of 46% in 2011. However, the fact that they gap between the two types of finance has narrowed, is clearly positive news for the alternative finance sector.

Often forms of alternative finance, such as factoring and invoice discounting, can offer businesses greater flexibility as the level of finance grows in line with growth in the business. This is not normally the case with overdrafts which tend to be for a fixed sum, and loans are normally a decreasing sum as repayments are made. In addition, some of the cost benefits of invoice finance can outweigh the benefits of overdraft. With facilties such as factoring, the inclusion of a fully outsourced credit control service can negate the need to employ credit control staff, or to waste the business owner's time undertaking that function.

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