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Overdraft accounts for businesses
You could get access to extra cash when you need it with a business overdraft.
Managing cash flow is a vital part of running a business successfully. However, sometimes you need access to some extra cash to help you cover a range of ongoing business expenses and keep trading normally. This is where a business overdraft comes in handy, designed to help provide cash flow relief when you need it the most.
What is a business overdraft?
A business overdraft is a revolving line of credit businesses can have access to when they need access to funds. For example, you may be waiting on payment from clients for completed projects, but you still need to be able to pay the bills and other ongoing business expenses.
A business overdraft can be useful to a wide range of businesses, as it offers the security and confidence that comes with knowing you will have the cash you need to pay suppliers and employees. It can also be used to expand your business or let you negotiate better terms on purchases by enabling you to afford larger upfront purchases.
How does it work?
A business overdraft is typically linked to the business transaction account you hold with your financial provider. It is a revolving line of credit that offers fast access to funds when you need them. Typically, you don’t have to provide collateral or any form of security, and you only pay interest on the amount you use. If you didn’t draw on these funds at all, you wouldn’t owe anything.
If you dip into the overdraft, you’ll have to make a monthly payment equaling interest charges plus a fee. The fee may be a flat-rate amount or a variable rate based on how much money you use. Your bank will have its own policies regarding what types of fee arrangements it allows.
What are the types of business overdraft?
- Secured loan. A secured loan requires you to offer an asset as security for the loan, which works to reduce the risk a lender faces by allowing you to access funds. By offering something as security, you can usually enjoy access to lower interest rates than on an unsecured loan and may also be able to take advantage of fewer fees.
- Unsecured loan. An unsecured loan does not require you to offer anything as security. As a result, you can typically expect higher interest rates and fees than on a secured loan because you pose more of a risk to lenders.
How do I compare business overdrafts?
- Interest rate. The lower the interest rate, the less you’ll have to pay in interest charges on the amount you spend. You may have the option of choosing between a predictable fixed rate or a variable interest rate that may potentially result in savings.
- Fees. Make sure to look at the fees and charges attached to every competing business overdraft. Look for application fees, monthly fees and any other ongoing fees. Also make sure you know how much you’ll be charged if you accidentally go beyond your overdraft amount or have a bounced payment.
- Repayment options. What repayment options does your business overdraft offer? Do you need to stick to a rigid repayment plan or is there any flexibility built in?
- Amount. Your bank may impose a minimum and maximum overdraft amount, which can go as high as $10,000 or more. Decide how much you’ll actually need to handle occasional financial pitfalls, and be cautious about applying for more than this amount.
What are the pros and cons?
- Extra security. A business overdraft gives you the peace of mind of knowing you can access funds when you need them.
- Flexible repayments. Overdrafts allow you to pay off the amount when you can—with no fixed repayment schedule—as long as you stay under an agreed limit on your account and make the required minimum payments.
- Many uses. You can use the funds in your overdraft account for many purposes, ranging from paying suppliers to covering small, unexpected expenses.
- Higher fees. Overdrafts tend to carry higher interest rates and fees than many other loans.
- Affects your debt-to-income ratio. Your overdraft will show up as a liability (or potential liability) to your bank, which may affect your application for other credit products if you already have an unhealthy debt-to-income ratio.
Things to avoid
As business overdrafts tend to attract higher interest rates and fees than other lending products, you need to be wary of getting into too much debt. It’s also vital to familiarize yourself with all the fees and charges attached to an overdraft before signing up.
Another common issue is that many products allow the lender to recall the overdraft at any time. This can be highly inconvenient for business owners.
Business bank accounts that come with the option of an overdraft
In order to apply for a business overdraft, you’ll need to open a business bank account to link the overdraft line of credit to.
There are a range of accounts out there that come with the option of having an overdraft. Once you’ve opened the bank account, depending on the size of the overdraft and the type of entity your business is, you can apply and get approved for the overdraft online and link it to your account to start accessing the funds.
Frequently asked questions
- Do I need to offer an asset as security? Not necessarily. Business overdrafts are available in secured and unsecured form.
- What is the purpose of a business overdraft? Overdrafts are designed to help you manage business cash flow, offering quick access to funds when you need them.
- What can I use the funds for? This is up to you. You might wish to use the funds to pay urgent expenses, expand your business or even negotiate better deals with suppliers.
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