Why Your Bank Wants To Move Your Overdraft To Invoice Factoring

Use of invoice factoring by UK companies has been falling during the credit crisis, however there are reports that this type of working capital finance has been rising recently.

The main reason that fewer businesses have been using factoring during the credit crisis is that quite a few companies went bust - no surprise there! Recent research has also indicated that many business owners are either not aware of invoice finance facilities or didn't like the cost of funds offered by banks, usually their own.

Significant rises in demand for invoice finance could be interpreted as new found confidence in the UK economy by businesses and that could explain the increase.

However an alternative explanation for a major proportion of the rise is that businesses (whose activities are suitable for factoring finance) are being herded out of overdrafts and into factoring as banks change lending criteria and leave business customers with little or no alternative.

There are two reasons why this process could be happening, the first is that banks minimum capital reserves / ratios to operate have risen during the credit crisis by order of the central banks. As even unused overdrafts have to have capital reserved against them then a generous view could be that the banks are maximising capital ratios.

A second, less generous view of the promotion of invoice factoring over overdrafts would be that factoring has in many cases been re-priced with new fees making an appearance (such as renewal or termination fees) or where they did pre-exist charges have increased.

Whatever the truth behind the move from overdrafts to invoice finance, one thing is for sure, if it happens to your company then a good commercial loan broker can probably find you a cheaper alternative to your banks factoring facilities without those extra fees you didn't think to ask about!