Bank overdrafts are financial facilities extended to individuals and businesses by banks where they are members. The bank allows the individual or business to withdraw funds from their account, over and above what they actually have, up to a set limit. Overdrafts are mostly emergency funds where a business needs funds in short notice to be repaid in the short-term. The major disadvantage of this financing method is the hefty interest rate charged on the amount.
Trade credit is a financial facility extended to the business by their supplier or vendor. The supplier delivers goods that will not be paid for immediately, but after an agreed period of time.
Credit cards are financial facilities that allow businesses to spend money they don’t have at the moment they need it. Businesses can make purchases using their credit cards. The vendor charges the card and the bank transfers the money. The business pays their debt to the bank after a short period of time. Some credit cards offer a grace period when they don’t charge interest if the debt is settled within that period.
Factoring is a financial facility that allows the business to sell its invoices to a bank or a financial institution offering factoring services. The business sells the invoices at a slightly lower value instead of waiting to be paid in full by their customers. Thus, the bank or financial institution collects the full value of the invoices and makes the difference.