Guide to Business Overdrafts
An agreed overdraft is an agreement that allows the customer of a bank to keep making payments even when there is no money in their bank account.
It can be a useful form of short-term business funding because it is only used when absolutely necessary. A business can arrange an overdraft facility with their bank as a contingency against a shortfall in cashflow but there is no obligation to use it.
However, banks usually reserve the right to ask for the overdraft to be repaid on request, meaning it is not a secure source of medium or long-term business funding.
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When to Arrange an Overdraft
All businesses should prepare cashflow projections for at least six months ahead. This allows identification of potential cash shortfalls, when the amount of money due to be paid out exceeds the projected cash available.
This projection will allow the business to decide whether some form of business funding, such as an overdraft, is required and what size it needs to be.
It is wise to allow at least a couple of weeks for putting the overdraft arrangement in place. The bank will need to review the request and might need additional information, such as copies of accounts and forecasts, all of which takes time to process.
The bank might also want some sort of security in place, such as a personal guarantee from a Director. They need to be confident that the overdraft will be repaid in due course.
Calculating The Cost of An Overdraft
An overdraft is just another form of lending and, as with all business funding, is subject to charges.
The typical arrangement fee will be several hundred pounds for a 12 month agreement, with the fee often based on the size of the facility. Interest will be charged on the amount borrowed. This is calculated daily.
One advantage of an overdraft is the interest can be minimised by using it as little as possible. However, once the arrangement is in place it is very easy to dip into the red on a regular basis and incur interest.
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Advantages and Disadvantages
Advantages:
- Overdrafts are a useful short term business funding solution.
- Money is only borrowed when needed.
Disadvantages:
- Banks usually reserve the right to call in an overdraft at short notice.
- Overdrafts can be difficult to extend if additional funding is required.
- Other forms of finance, such as factoring, offer greater flexibility.
Free Business Funding Advice From Touch Financial
As the leading UK commercial finance broker we offer a free service to UK businesses, providing guidance on the best commercial finance solutions and making introductions to finance providers.
Taking an overdraft or a loan from your current bank might not be the most cost effective solution to your business funding issues.
We work with a panel of over 20 lenders, from major banks such as Lloyds Bank Commercial Finance and the Bank of Scotland, through to niche finance houses.
Our experience with thousands of customers gives us confidence that our recommended solutions for business finance will work. Make contact with Touch Financial today to see how we can help you.
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Also in this section:
- Overview of Business Finance
- Finance for Business - Help, Advice and Quotes
- Finding The Best Deal - Search for Funding
- Small Business Funding - Fuel Your Growth
- Funding To Start A Business
- Business Funding For Distressed Businesses
- Small Business Finance for Better Cash Flow
- Guide to Business Overdrafts
- Guide to Business Credit Cards
- Business Finance - Protecting Future Income with Credit Protection
- Avoiding Financial Difficulty
