A Business Overdraft helps your company prepare for the unexpected.
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What is a business overdraft?
A business overdraft is a line of credit facility, that allows your company to continue accessing funds — even after your bank account balance falls to zero (comparable to how a personal overdraft works).
In other words, if your business has an overdraft facility — you have access to more money than you actually have in your account.
Business overdraft — considerations
A business overdraft gives you a way to better manage your cash flow, and is particularly helpful when it comes to dealing with unexpected expenses and other short-term funding needs.
With a business overdraft, you have a maximum draw amount — that can be accessed and used at any time. Interest is applicable on any funds you do borrow, and because it’s a short-term financing option — interest rates can be high.
Depending on the agreement, interest may be calculated on a daily or monthly basis — once overdrawn. Pre-arranged overdrafts have lower interest rates than unauthorized overdrafts.
If you do get overdrawn, it is advisable to pay back the overdraft as soon a possible — to avoid excess fees.
How do business overdrafts work?
To avoid paying the higher interest rates, applicable with unauthorized overdrafts, you would need to approach your bank — to arrange an authorized overdraft in advance. The bank would then asses your eligibility and credit worthiness.
In deciding whether to approve your overdraft request, and the amount you can borrow — banks look for good credit history, steady income as well as whether or not your business has assets. Your personal credit history may also be taken into account.
Should you be eligible, the bank will set you a borrowing limit and you’ll subsequently be allowed to borrow funds — when your account balance falls to zero. The borrowed funds can then be repaid back — as and when your business has the means to do so (though most overdrafts are repayable on demand).
Your overdraft may be secured or unsecured. Additionally, some overdraft arrangements are also subject to a number of charges, including: set up and renewal fees.
Benefits of a business overdraft
- Relatively quick to arrange
- Flexible term limits
- Can be used to pay for anything
- Acts as a safety net — for emergency expenses
- Particularly useful for seasonal businesses
- You only pay interest on monies borrowed
- No early repayment fees
- Collateral is not always needed
Limitations of a business overdraft
- Interest rates can be high — especially with unauthorized overdrafts
- Other fees may be applicable — setup, renewal etc.
- Cant shop around — overdrafts are tied to your business bank account
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