Factoring recommended over overdrafts for small businesses

23/06/2011

In an economic climate still dominated by uncertainty, everyone is looking for the safest way to handle their money. For small businesses, it is imperative they choose wisely, as banks are growing increasingly selective and one mistake could make it much harder for them acquire finance later on.

A senior banker speaking to the House of Commons made no secret of his feelings on overdrafts, saying that “giving a small business an overdraft is like handing a child a loaded gun,” a quote that has already attracted considerable controversy. He went on to advocate for invoice discounting, arguing that it was a “highly inexpensive form of finance if used properly”.

The small business sector’s demand for overdrafts is still increasing. 25 per cent of all firms applied for one in 2007 - by last year, the demand had climbed to 35 per cent. By contrast, banks are growing warier of them; Lloyds and RBS are keeping their promise not to alter the terms of borrowing facilities before they have matured, but they are both making sure their customers have other options available.

One site of growth is the practice of lending against assets, such as invoice factoring. Figures from the Asset Based Lending Association show 9 per cent growth in the first quarter of 2011, reaching £12.4 billion.