From a piece of equipment breaking to the cancellation of a major order, business owners often have to deal with unexpected costs that can push their business account balance below zero.
An overdraft facility can be a solution, but only once you’ve ruled out the alternatives, because it can be quite expensive.
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What’s a business overdraft?
A business overdraft is not unlike a personal overdraft: it’s a feature of your business current account that allows you to keep spending even if your account balance goes below zero.
Just like with personal accounts, you can choose whether or not you do want one as part of your account. There are quite a few fees and costs (more on this below), so you should weigh up options carefully before applying.
Business overdrafts are a flexible, if not cheap, way of borrowing money, and can help you with unexpected costs (bills, invoices and so on) as well as with occasional cash flow issues.
Can I get a business bank account with an overdraft?
Most traditional banks offer business overdrafts with their business accounts, and even some challenger banks will let you apply for one.
Business overdrafts are more often unsecured, but some banks may also offer a “secured” option, which means you’ll have to use your business assets as collateral.
Limits, interest rates and fees will depend on the bank, on your business’s turnover, and on how much you borrow during the year.
How much does a business bank account with an overdraft cost?
There are two main sets of costs to take into account:
- Interest rate. This is only charged if you do in fact end up using your overdraft. The rate you are offered will often depend on your business turnover and credit score. The final cost will also depend on how long it takes you to pay the overdraft back. The rate is usually variable, which means that it changes with the Bank of England official base rate.
- Fees. These tend to be fixed and are charged annually or monthly. Some banks will charge it whether you use the overdraft facility or not (and call it something like “arrangement fee”).
The advertised interest rate on business overdrafts is often quite decent, but do keep in mind that it is not necessarily the same as what your business will be offered (which will largely depend on its credit score).
On fees, make sure you have read the terms and conditions carefully so you know what and when you’ll be charged. You should also watch that you don’t go beyond your arranged overdraft’s limit to avoid any unauthorised borrowing fees, which can be quite hefty.
Will I be credit-checked if I apply for a business bank account with an overdraft?
Yes, the bank will check your business credit score. Depending on how it is, your business may be refused the overdraft application or offered a higher rate. You can check your credit score here.
However, many banks will let you check your eligibility first. Using a so-called “eligibility checker” is always a good idea because it will tell you how likely your business is to get accepted without leaving a trace on your credit record.
Who might open a business bank account with an overdraft?
An overdraft can be a good option for a number of businesses, from very small to bigger ones.
However, it should be seen as a safety net you can fall on if something goes wrong more than as a line of credit to use regularly. It is a fairly expensive way of borrowing money, so if you need it often, you may want to look for a cheaper solution.
For example, you can consider a business credit card, which can help your business cash flow and lets you borrow interest-free as long as you always pay back your bill on time. Fees also tend to be lower than with overdrafts and you might get additional benefits too.
Pros and cons of business overdrafts
- Business overdrafts are a great safety net to cover unexpected costs.
- You can use the funds for any purpose.
- They are very flexible; you can borrow money anytime and pay it back anytime.
- You only have to pay interest if you do in fact use the overdraft facility.
- Quick to arrange as it’s just an extra feature of your business account.
- Fees can be quite high, even if you don’t use the facility.
- As overdrafts are part of your business account, shopping around for the best deal is a bit hard unless you are prepared to switch the whole account.
- Only available to businesses that have a pretty good credit score.
The bottom line
Just like personal overdrafts, business overdrafts shouldn’t be used all the time; but they can be good to have if anything goes wrong and your business has to face extra costs.
Be especially careful when applying and make sure you have read and understood all the fees and costs (particularly what happens if you go over the credit limit).
Frequently asked questions
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