SMEs across the UK have been struggling to make ends meet for some time. Energy prices are skyrocketing, inflation is relentless and it is becoming increasingly expensive to purchase even the most modest inventory.
Consequently, SME reliance on overdrafts is hovering at a 10-year high. In an attempt to keep cash flow as liquid as possible, many thousands of SMEs have resorted to costly overdrafts. Perhaps, in many cases, unaware of the alternatives available to them.
True, an overdraft can be an extremely convenient facility to have. You can dip in and out of it as and when you need to, you might be able to qualify for a decent credit limit (if your own credit file is on point) and a typical overdraft is fairly fast to arrange.
This would be great, but when you factor in the potential downsides to the deal, you find yourself questioning the all-around merit of business overdrafts.
The Potential Pitfalls of SME Overdrafts
The simple fact of the matter is that for the virtues they have, overdrafts are far from ideal funding solutions for SMEs. Most of which bring the following into play:
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High Interest Rates: Overdrafts typically come with higher interest rates than other forms of financing (some as high as 10%), which can be a burden for SMEs who may already be struggling to manage their cash flow.
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Additional Fees: Most facilities also come with a range of fees, such as set-up fees, overdraft fees, and renewal fees, which can add up quickly and make the financing option cost-prohibitive for small businesses.
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Limited Availability: Overdrafts are typically only available to businesses with established banking relationships, so start-ups and newer businesses may not be able to access them in the first place.
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Unpredictable Interest Rates: The interest rate on an overdraft can fluctuate, which can make it difficult for businesses to plan and budget for their cash flow.
Put the pieces together and you have a fairly large financial headache most SMEs would prefer to avoid.
Alternative Funding Solutions
As more SMEs explore funding options beyond the usual High Street services, the lines between ‘conventional’ and ‘alternative’ products are becoming increasingly blurred. Many specialist services once considered niche have crossed convincingly into mainstream territory, having become more broadly available and competitive than ever before.
Two examples of these include the following:
Supply chain finance
SCF provides SMEs with access to flexible short-term commercial financing that can help them manage their cash flow. This form of finance is engineered to enable SMEs to pay their suppliers early and receive payments from their customers faster, thus increasing their cash flow and liquidity. SCF allows SMEs to automate their supply chain processes, reducing manual labour and paperwork. All while building strong relationships with their suppliers and customers, as an added bonus.
Invoice finance
Invoice financing allows businesses to receive funds quickly, without having to wait for customers to pay outstanding invoices. This can be especially helpful for SMEs that have limited access to traditional forms of financing, along with those that regularly have to wait weeks or months for their own customers to pay them. With invoice finance, businesses can access the cash they are owed immediately, allowing them to pay their suppliers, staff and other necessary costs. This can help SMEs to stay afloat and maintain their operations, even when cash flow is tight.
These are just two of the many options available from specialist lenders (and via independent brokers), which offer much greater flexibility and cost-effectiveness than conventional overdrafts. Business overdraft reliance may be at a 10-year high, but SMEs looking to escape the trappings of these costly cashflow tools have an abundance of options open to them.
Source: Story.KISSPR.com
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