UK Cash Flow Crisis: Recovery Loan Scheme vs Invoice Finance vs Overdraft (Real Cost Comparison)

The Cash Flow Gap That Kills Profitable Businesses#

Mike runs a profitable construction subcontracting firm in Bristol. Revenue last year: £480,000. Net margin: 12% (£57,600 profit). But his main contractor pays 60 days late. Mike has to pay his workers weekly and materials suppliers within 30 days. The result: a recurring £40,000–£60,000 cash flow gap every month despite being profitable on paper. In January he can't make payroll. He puts £30,000 on a personal credit card (24.9% APR). By March the interest alone costs £620/month. A profitable business, slowly being strangled by a cash timing problem.

Option 1: Recovery Loan Scheme (RLS)#

Government-backed loans via accredited lenders (HSBC, Lloyds, Funding Circle, etc.). Terms: (1) Loan: £25,001–£2M. (2) APR: 6–14.99% (lender sets rate; government provides partial guarantee). (3) Term: 3 months to 6 years. (4) No personal guarantee required for loans under £250K. Best for: larger, longer-term gaps. Cost example: £60,000 over 12 months at 10% APR = £5,272 interest. Downside: takes 2–4 weeks to arrange. Not suitable for immediate payroll crisis.

Option 2: Invoice Finance#

Advance cash against unpaid invoices. Types: (1) Invoice factoring — lender collects from your customers (visible to them). (2) Invoice discounting — you collect; lender advances against the ledger (confidential). Typical terms: (1) Advance rate: 80–90% of invoice value. (2) Fee: 1–3% of invoice value per month outstanding. (3) Arrangement fee: £500–£2,000. Cost example: £60,000 invoices, advance 85% (£51,000), 2% fee/month, paid after 60 days: cost = £2,040 for 2 months. Effective APR: ~24%. Best for: businesses with reliable, creditworthy debtors and recurring invoice cycles. Downside: expensive for longer terms; customers may notice factoring.

Option 3: Bank Overdraft#

Arranged overdraft from your business bank. Terms: (1) Limit: typically £5,000–£50,000 (larger for established relationships). (2) EAR: 15–20% (varies by bank and relationship). (3) Arrangement fee: £100–£500/year. (4) Usage: flexible — draw down and repay as needed. Cost example: £30,000 overdraft used for 60 days at 18% EAR: cost = approximately £887. Best for: smaller, short-duration gaps where you have a strong banking relationship. Downside: limits are often too small for significant gaps; banks can withdraw facilities at any time.

AskBiz Cash Flow Funding Modeller#

AskBiz analyses your cash flow position and models the real cost of each option for your gap: "You have a projected £45,000 cash gap in 34 days, expected to clear in 55 days when Customer X pays. Cheapest option: arranged overdraft if your limit is sufficient (estimated cost: £760). If overdraft unavailable: invoice finance on the Customer X invoice (cost: £1,620). RLS only recommended if gap exceeds 3 months or exceeds £100K." Gives you a ranked cost comparison before you sign anything. Prevents expensive mistakes like reaching for a credit card at 24.9% when a £760 overdraft would do.

• UK SMBs hit by late-paying customers face three main cash flow fixes: Recovery Loan Scheme (government-backed, 6–14.99% APR, up to £2M), invoice finance (advance 80–90% of invoices at 1–3%/month), or bank overdraft (15–20% EAR).
• The cheapest option depends on your gap size, duration, and debtor quality.
• AskBiz models the real cost of each for your specific situation.