Invoice discounting v Overdraft facility

This is a question that I am often asked and unfortunately it is a purely academic question for most businesses. Due to certain test cases relating to floating charges banks are no longer comfortable to lend on overdraft where the major asset within a business is the debtor book. On that basis invoice finance is typically the only option available to a business.

That said let’s compare them as working capital facilities.

An overdraft facility typically attracts two main charges – an arrangement fee which can be circa 2% of the facility limit and an interest rate that you pay on borrowings. Let’s assume you had a £100,000 facility and borrowed £100,000 for the year. You could pay a 2% arrangement fee and 4% over base as an interest rate. Over a year this would equate to £6,500 in charges.

In a similar manner and invoice discounting facility has two main charges – a service fee and a discounting fee which equates to the interest charge on an overdraft. Let’s assume you had a business with a turnover of £750,000 with an invoice discounting facility of £100,000 and borrowed on average £100,000 for the year. The service fee would probably be about 1% but importantly this is applied to turnover rather than the facility limit which results in a service fee of £7,500. On top of that let’s assume a discounting margin of 3% over base. This would result in a discounting charge over the year of £3,500. Total costs amount to £11,000. On top of these charges for invoice discounting could be arrangement fees, audit fees, CHAPS transfer fees, etc..

So in short the fees for an overdraft facility are typically considerably less than those for an invoice discounting facility.

However, this is rarely an option. Most businesses would be better looking at the alternative providers of invoice discounting and assessing what options are available. It is important to structure a facility that will work for your business and then look to minimise costs.