Why an overdraft is not always the best option

Small businesses in the UK owe £15.9 billion in overdrafts according to new independent research commissioned by GMAC Commercial Finance .

The survey found that 20% of SMEs currently have bank overdrafts of more than £20,000, money that could be put to better use if invested back into their businesses.

According to the Department of Trade and Industry (DTI), the 3.9 million SMEs in the UK account for 99.8% of total businesses in the UK and have a combined annual turnover of £1,153 billion.

Although most of these SMEs will require debt facilities at some point to expand and develop their business, keeping a high overdraft is not always the best option as it can be expensive and may leave fewer options when unexpected events or business opportunities arise that require capital outlay.

So what are the choices?

There are a number of alternatives to an overdraft available to small business owners and various online tools and calculators to help small business owners improve their cash flow situation:

• Consider factoring your invoices. Your unpaid invoices could be the biggest asset on your balance sheet. A factoring company can advance up to 90% of the value of your outstanding invoices, typically within 24 hours.
• Get a short term loan. Personal loans, business loans and personal loans for business purposes can be secured on a variety of different assets to help you through a rough patch.
• Change your business bank account. Banks have now started to compete for your business so compare their interest rates and charges carefully, you might be able to reduce your monthly payments considerably.
• Re-mortgage to free up capital. If you’re a homeowner it’s worthwhile changing your mortgage to a lower interest rate while the base rate is still low. You could either reduce your monthly mortgage payments or release some of the equity tied up in your property.
• Lease expensive equipment rather than buying. Whether you run a factory with specialist machinery or you need up to date computer hardware, leasing allows you to use the asset without owning it outright. You can even sell an asset you already own to a leasing company and then lease it back again – it doesn’t have to move.