Everything You Need to Know About Business Overdraft
In business, bills are a common thing, but payments are not. To even up the pressure on your cash flow, banks allow businesses access to funds as they wait for their debtors to pay. You can use these resources to meet short-term business needs. Overdrafts are ideal for SMEs with fluctuating finances.
What is business overdraft?
An overdraft is an amount you can withdraw from your current business account when your balance is below zero. Overdraft facilities are meant to meet your short-term needs and to allow you to spend more than you have temporarily. They also come in handy as a back-up for that unexpected expenditure. The interest rates could be high, but you only pay interest on the money you use. You should not exceed the agreed amount.
Business overdrafts can either be authorized or unauthorized. When a bank approves an overdraft, it will charge lower interest rates than when you are using the unauthorized facility. It is therefore wise to use authorized service should the need of funds arises. This will save you from the extra charges your business will incur.
Key benefits of bank overdrafts
- You don’t have to give up a share of your business. Once you pay up the borrowed funds, your commitment is over.
- You only pay interest on the overdrawn amount.
- There are usually no penalties on early repayments of your overdraft facility.
- Overdrafts will ease pressure on your cash flow and help you fund that unexpected business need.
- They are quick and easy to process and give you immediate accesses once the facility has already been agreed.
- Ideal for short term business needs.
- Failure to pay the overdrawn amount may lead to lenders seizing your assets especially if it was secured.
- Your credit score could drop, your interest rates raised or even legal proceedings effected against your business and the management if you don’t pay up or constantly renew your debt.
- Your business financial situation has to be scrutinized first before granting you the facility. If your business is risky, the lender may not grant you the whole amount as requested.
- The variable interest rates make overdrafts expensive.
Bank overdrafts come at a cost. You need to take into account these costs when considering such services to help you make a better judgment.
Some of these costs are:
This cost is usually a one off fee. You will have to pay your lender some fees to reserve the funds for you and to cover the opening costs.
Your lender will have to maintain your facility. This means you have to pay a monthly charge for this process.
This is the cost of the borrowed funds. The interest rate will vary depending on how risky your business is. You are likely to pay more if your overdraft is unauthorized. If you provide security in the form of assets or guarantees, your cost of capital is likely to be lower because the risk will always be lower.
Unauthorized borrowing fees
If you exceed the agreed amount, you will be penalized for it.
Depending on the size, the complexity of your business and risk to the lender, the bank may require a legal service especially if the security offered is joint property.
Professional advice fees
The bank may go an extra mile of preparing documents and providing other professional services. Apart from managing the accounts, the bank may also offer services like bookkeeping. These additional services will cost you.
When applying for a business overdraft, you have to put the following into consideration:
Security – bank loans can either be secured or unsecured. Secured bank loans attract lower interest rates than unsecured loans because they are considered less risky. Different lenders have different preferences, but security can be in the form of real estate, commercial property or guarantors.
Credit history – you have to be in good books with lenders. A good credit history will go a long way in helping you secure funding because there will be no risk of default.
Borrowing and banking history – lenders need to see that you have been their client and that you stay within the approved loan limits.
Business overdrafts are a good source of financing for your short-term business needs. They cushion you until you get paid. If you are having trouble repaying your overdraft, you can always negotiate with your lender to extend the term or even turn it into a medium term loan.
Not sure if you qualify for an overdraft facility from your bank? Call us today and get expert advice on all your financial needs and situations.