Overdrafts and Invoice Finance are useful funding solutions to help businesses fund growth or manage cash flow. 

But there are significant differences and advantages to each. Choosing the most suitable solution for your business can reduce costs and make it easier to pay back the financing. 

This article will outline the differences between overdrafts and Invoice Finance. By the time you reach the end, you should better understand what each solution involves and which is the best option for your business. 

Invoice Finance

Invoice Finance is a category of financing that describes several solutions. The most widely used are Invoice Discounting and factoring. 

These solutions enable you to use your outstanding sales invoices as collateral to access funding. Invoice financing bridges the gap between raising an invoice and receiving payment. 

Instead of waiting 30+ days for a customer to pay, you can submit the invoice for financing and receive a cash advance of up to 95% of the invoice value upfront. Then, when your customer pays, you receive the remaining invoice balance, less fees. 

The main difference between Invoice Discounting and factoring is the collection of the invoice payment. 

The finance provider will handle the collections and credit control with an invoice factoring facility. This usually means your customers will be aware of your relationship with the Invoice Finance company. 

With Invoice Discounting, your business maintains responsibility for collecting the payment from your customer. This means your customer is usually unaware of the Invoice Finance facility.

There are also the options of whole ledger or Selective Invoice Finance, where you can choose which unpaid customer invoices to submit for funding. 


Most business owners are aware of how a bank overdraft works. It’s a credit facility that allows a business to continue to withdraw funds after the account balance has reached zero. 

The lender will agree to a set overdraft limit as part of the agreement. The business can withdraw up to this limit and is charged interest for the credit used. If you exceed the authorized overdraft limit, the lender will usually charge fees and higher interest rates. 

Depending on the terms of the facility, an overdraft may be secured by real estate collateral or business assets. Some providers do offer unsecured business overdrafts.

How Is Invoice Finance Different to an Overdraft?

Both business finance solutions can support working capital needs and provide flexible access to credit. So what’s the difference between Invoice Finance and overdrafts?

The main difference is that Invoice Finance releases money already in your business. You can access the capital tied up in your accounts receivables. 

That means Invoice Finance always grows in line with your business. As you raise new invoices, the amount of credit you can access increases. You don’t have to worry about cash flow gaps impacting your working capital. Because the funding is tied to the money owed to your business, it’s also much easier to manage repayments. 

In comparison, an overdraft is less flexible. The funding provider agrees to a set overdraft limit. Once you reach that limit, you can’t access any more credit. This can be an issue for growing businesses that require access to funding so that cash inflows keep up with growth. 

But there are also advantages to an overdraft facility. Let’s take a closer look at the most important features of both funding options. 

Invoice Finance vs. Overdraft Features Compared


Invoice Finance

Invoice Finance is one of the most flexible types of business financing. Your access to credit increases with sales, so you can always get the funding you need. In addition, there are options of come and go Selective Invoice Finance or full-service factoring. 

You can choose which invoices you want to fund and if you wish to outsource collections and account management to the financing company. 


An overdraft can provide flexible access to funding when you need it. You can make payments and withdraw funds up to the pre-arranged overdraft limit. But there are some restrictions. For example, if you want to increase your credit limit, you’ll need to renegotiate your facility with the funding provider. 


Invoice Finance

Once the Invoice Finance facility is in place, you can access funds within 24 hours of raising an invoice. It’s also much faster to set up an Invoice Finance facility. The application process is straightforward and involves minimal paperwork compared to an overdraft.


An overdraft is faster to set up than a typical bank loan, but the application and approval process is longer than most invoice financing solutions. If the overdraft is secured by property or business assets, the lender will conduct an appraisal before approving the facility. Once the overdraft is in place, you can use the funds immediately. 

Credit Limits

Invoice Finance

Invoice Finance companies allow you to access up to 95% of the invoice value within 24 hours of submitting it for financing. The total funding you can access is limited by the value of your outstanding sales invoices. As you make new sales, you can access more credit. 


Business overdrafts in Australia range from $5,000 to $500,000+ depending on your credit rating, trading history, and the assets you can provide as collateral. You’ll need to reapply every time you need to increase your limit, so it’s important to secure an initial limit that meets your ongoing funding needs.


Invoice Finance

The cost of invoice financing can vary depending on your business risk profile, your customers, and other factors. Generally, you will be charged an interest fee based on the time the invoice is outstanding and a service fee based on a percentage of the total invoice value. 

You can learn more about the factors that influence Invoice Finance costs in our guide, The Costs of Invoice Financing Explained.


Overdrafts costs can vary depending on the terms of the facility. Like Invoice Finance, you will be charged an interest fee on the credit you use. There may also be one-off set-up fees and ongoing account fees. If you exceed your credit limit, you’ll likely be charged a penalty fee and higher interest rates. 

Overall, an overdraft can be an affordable way to support working capital if you stay within your limit and aim to clear your balance quickly. However, if you remain in a negative balance for an extended period, the fees and interest charges can mount up quickly. 


Invoice Finance

The only assets required to secure an Invoice Finance facility are the outstanding sales invoices you submit for funding. Some Invoice Finance providers may also require a personal guarantee from the business owner. 


Most business overdrafts need to be secured with a residential property or commercial assets. Some lenders offer unsecured overdrafts with a personal guarantee, but the interest rates and fees are typically higher. 


Invoice Finance

Invoice Finance is much more accessible than overdrafts. Funding providers base lending decisions on the creditworthiness of your business and your customers. Small businesses, startups, and companies without a perfect credit rating can all qualify for invoice financing. 


The lending criteria for an overdraft is generally much stricter than Invoice Finance. You’ll need an established trading history, good credit rating, and property or asset collateral to qualify for an overdraft.

In 2018, almost 50% of Australian companies with 200+ employees received bank overdraft financing. Despite large enterprises making up the smallest share of businesses, they are much more likely than SMEs to be able to access overdraft funding. 

Which Is Right for Your Business?

So is a bank overdraft, Invoice Finance, or another business finance solution the best option for you?

The right option will depend on your unique business circumstances and cash flow needs. 

For a fast-growing business, Invoice Finance can ensure that working capital keeps up with cash flow needs. Invoice financing is also much more accessible for smaller businesses and those who don’t meet the eligibility criteria for an overdraft. 

An overdraft could be a good option if you’re an established business looking for a financial safety net to cover occasional cash flow requirements. But a traditional overdraft isn’t the only property secured funding solution. 

Business Cash on Call is a working capital facility secured by residential property. It’s an effective way to use the extra equity in your home to access affordable cash flow financing. 

Financing Your Business With ScotPac

Invoice Finance and overdrafts are just two of the many funding options available to SMEs. If you need help deciding which type of financing is the best fit for your business, our ScotPac lending experts can help.

Our clients grow at 3x the rate of the average Australian business. We’ll help you get a tailored funding solution that unlocks potential and fuels growth. 

Give us a call on the number below or submit an enquiry using our simple online form.