CC/OD or invoice discounting: which fits your cash cycle

What a CC/OD actually lends against

A cash credit or overdraft limit is a revolving facility. The bank sets a ceiling, you draw as needed, and interest accrues only on the outstanding balance, usually calculated daily. Repayment is not on a schedule — the facility simply revolves as receipts come in.

The limit is not arbitrary. It is derived from your current assets through a drawing power calculation. In simplified form: eligible stock plus eligible book debts, less creditors, less a stipulated margin. You submit monthly stock and book debt statements, and drawing power is recomputed from them.

This is the important structural fact. Your available limit is not fixed at the sanctioned figure — it is whatever drawing power supports this month, capped at the sanction.

Where CC/OD stops working

Two failure modes, and both arrive at the worst possible time.

First, ageing receivables. Book debts usually count towards drawing power only up to a permitted age — ninety days is common. When a large customer stretches from sixty days to a hundred and twenty, those invoices drop out of the calculation. Your drawing power falls precisely because you are being paid more slowly, which is the moment you most need to draw.

Second, the limit is reset annually against last year's numbers. A business growing quickly spends much of the year constrained by a limit sized for a smaller company. Enhancement is possible but is a fresh assessment, and it takes time you may not have when an order has already landed.

What invoice discounting does differently

Invoice or bill discounting funds a specific invoice raised on a specific buyer. The financier advances a percentage of the invoice value — commonly seventy to ninety per cent — and recovers on the due date, releasing the balance less charges.

Two consequences follow. The facility scales with your sales rather than with an annually assessed limit: raise more invoices on acceptable buyers and you can discount more. And the underwriting weight shifts substantially onto your buyer's credit rather than yours, which is why a small supplier to a large, well-rated company can often discount at rates its own balance sheet would never command.

The constraint is the mirror image: it only works for credit sales to buyers the financier will accept. Cash sales, retail trade and fragmented small buyers do not fit.

Comparing the cost honestly

This is where most comparisons go wrong. A CC/OD is quoted as an annual rate on the outstanding balance. Invoice discounting is often quoted as a flat discount on the invoice for the funding period.

Those are not comparable numbers. To compare them, convert the discounting charge to an annualised cost over the days actually funded. A charge that sounds modest on a forty-five day invoice can annualise to considerably more than a CC/OD rate — or considerably less, depending on the buyer's rating. You cannot tell without doing the arithmetic.

Also count what sits outside the rate: processing and renewal fees, the cost of stock audits on a CC/OD, platform charges on discounting, and on the CC/OD side the opportunity cost of the margin you are required to maintain.

Which to use, and why most businesses use both

• CC/OD suits a business with steady inventory, a spread of buyers and a predictable cycle. It is flexible, cheap on unused limit, and the money is there without a transaction each time.
• Invoice discounting suits concentrated sales to strong buyers, long or lengthening credit periods, and growth that has outrun the sanctioned limit.

In practice many businesses run a CC/OD as the base facility and discount selectively — the large invoices, the slow-paying buyers, the month a big order lands. That combination keeps the cheaper facility as the default and uses the more expensive one only where it earns its cost.

Where receivable risk itself is the problem rather than timing, factoring is the adjacent product to look at, and for export sales export bill discounting handles the currency and shipment dimension that domestic discounting does not.