Many businesses had been relying on bank overdrafts when experiencing cash flow problems, but this has changed significantly following the occurrence of the latest financial crisis. Since 2011, the number of business overdrafts was largely reduced as banks continue downsizing their lending capacity to small businesses. This cutback of business overdrafts has affected many small and medium-sizes enterprises (SMEs), especially those based in the northern part of the country. Over the last few years, only 25 percent of companies based in London had their business overdrafts withdrawn, while a colossal 55 percent of northern companies were affected.
The impact of bank overdraft removal has not only been on SMEs but also on the country’s economy. It is estimated that the country has lost £2.9 billion in the last 5 years because of bank overdraft removal. Therefore many businesses are looking for other financing alternatives in case their bank overdrafts are withdrawn. Five alternatives that businesses can use to replace their bank overdrafts are:
1. Merchant cash advances
Considered to be the most suitable type of advance for unpredictable businesses that get paid through card terminals, merchant cash advances are basically turnover loans that are based on card sales. The amount of advances that a business qualifies for depends on its trading over the past few months. Repayments are made as a percentage of monthly sales.
2. Alternative overdrafts
Alternative overdrafts are similar to traditional business overdrafts. The business agrees on the maximum amount to borrow and when to use it. Interest is only paid on the amount used, and the business may be required to give some collateral.
3. Revenue loans
Revenue loans are in essence turnover loans which are based on the recent balance sheets of a business. Repayment is made as a percentage of forthcoming monthly revenues.
4. eCommerce loans
These are specially designed loans for businesses that sell their products through websites, such as eBay. Smart software is used to scan payment accounts of the borrower then uses existing data to enable the application.
5. Income finance
It is suitable for businesses that base their transactions on credit. If the business has issued an invoice to a customer for work completed, it qualifies to get an advance of up to 90 percent of the invoice amount. When the customer pays the invoice, the business gets the remainder after subtracting the lender’s fee.
These are just but a few examples of financing alternatives. This means that businesses can still overcome the challenge of cash flow even if their bank overdrafts get withdrawn by selecting from a number of financing alternatives, based on what best suit them.