Invoice Finance vs Overdraft: Which Is Better for New Zealand Businesses?
One of the most common questions I get asked by business owners is whether they should use an overdraft or invoice finance to support cashflow. The answer probably won’t surprise you, it depends on the business, what it's trying to achieve and what assets are available to support the facility. Sorry!
Many businesses start with an overdraft through their bank. It's familiar, relatively simple and often the first funding solution business owners think about when cashflow becomes tight. You link your personal property into it, bank probably already has your transactional accounts, maybe some term debt or an asset.
The challenge is that as businesses grow, the limitations of an overdraft can sometimes become more noticeable, particularly when sales are increasing and more cash becomes tied up in debtors.
Rather than asking which facility is better, I think it's more useful to understand how each one works and where it typically fits.
How An Overdraft Works
An overdraft is generally a fixed facility provided by a bank that allows a business to draw its account below zero up to an approved limit. For many businesses, it's a flexible solution that can help manage seasonal fluctuations, short-term cashflow gaps and unexpected expenses.
When assessing an overdraft application, banks will often look at the overall strength of the business. Every bank has its own assessment criteria, but factors such as profitability, balance sheet strength, security position, trading history and cashflow performance are usually important considerations.
One of the advantages of an overdraft is its simplicity. Once the facility is in place, businesses can use it as required without needing to reference individual invoices or transactions. The downside is that the facility limit is typically fixed and doesn't automatically increase as the business grows.
How Invoice Finance Works
Invoice finance takes a different approach. Rather than focusing primarily on the balance sheet, funding is generally provided against outstanding invoices issued to customers.
By the time many businesses explore invoice finance, they've already done the hard work. They've won the customer, delivered the product or service and issued the invoice. The challenge is they're now waiting 30, 60 or sometimes 90 days to be paid while still needing cash to fund operations.
Invoice finance allows businesses to access a portion of those invoices before payment is received. As sales increase and the debtor ledger grows, the available funding can often grow as well.
This is one of the reasons invoice finance is commonly used by businesses experiencing growth. Unlike a fixed overdraft, the facility has the potential to expand alongside receivables.
What Do Banks Prefer?
This is where things become difficult to generalise because every bank has its own appetite, policies and credit criteria.
In my experience, banks are often strongest when businesses have a solid balance sheet, a strong security position, a proven trading history and predictable cashflow. Those businesses can often access competitive overdraft facilities and broader banking support.
However, not every business fits that profile. Some businesses are growing quickly, have significant amounts tied up in debtors or may not yet meet every criteria a bank is looking for. In those situations, invoice finance can sometimes provide additional flexibility because the funding is linked more closely to receivables than fixed balance sheet metrics.
Which Facility Supports Growth Better?
One thing I've noticed working with growing businesses is that cashflow pressure often arrives long before profitability becomes an issue.
A wholesaler might secure a major new customer. A manufacturer might win a large contract. An exporter might receive larger orders than ever before. While these are all positive developments, they often require additional working capital.
This is where the difference between a fixed facility and a receivables-based facility becomes important. An overdraft may remain unchanged even though sales have increased significantly, whereas invoice finance can often expand as new invoices are generated.
That doesn't automatically make invoice finance better. It simply means the facility structure may align more closely with the growth profile of certain businesses.
It's Not Always One Or The Other
One of the biggest misconceptions is that businesses must choose between an overdraft and invoice finance.
In reality, many businesses use multiple facilities at the same time. It's not uncommon to see overdrafts, trade finance and invoice finance working together as part of a broader funding structure.
The right solution depends on the business, the industry, customer payment terms, growth plans and the overall funding requirement.
If You Want to Talk It Through
If you want a quick idea of what this could look like for your business, I’m happy to run through it with you.
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