Why Overdrafts are Rubbish

Sydney Outsourced CFO Thomas Taylor - Sunday, October 08, 2017

A while ago I wrote about why you should bootstrap for as long as you can noting... "Apart from the obvious benefits of having all of the equity, and not having other people to appease, who might tell you what to do, the greatest advantage is the freedom to make inexpensive mistakes."

The same things can apply to an overdraft from a bank but for a long time there hasn't been a lot of choices. There has been invoice finance, sometimes known as factoring, but it can be expensive and has the drawback of having to tell your clients to pay a finance company instead of you. Plus it often causes terrible reconciliation problems for back office because when customers pay the finance company they deduct their interest and fees then deposit the net amount into your bank account. 

However, the advantages of this sort of financing are that a business can get cash flow funding based on what they have actually sold. Not only can it grow with a growing business but shrink too, thus not enabling profit problems. And that is important because most cash flow problems are actually profit problems and borrowings can allow them to not be addressed, at least for a period of time.  

There is currently a revolution going on in Fintech and there are some great new solutions about. What has enabled this is Xero accounting software's ecosystem for Fintech startups providing access to your accounting data via APIs. That solves the reconciliation problem, they just use a separate bank account that has Xero bank feeds, and also allows integration of the administration for both the business and the lender. And interest rates are now equivalent to bank overdraft rates.  

The one we like is called Waddle. A good starting point to see how this stuff can work.

 

 

 

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