What is a business overdraft?

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A business overdraft acts in a similar way to a line of credit. However, it is obtainable as soon as you make a withdrawal for any amount exceeding what you currently have in your business account. The advantage of this is that it offers your business flexibility as you are able to withdraw cash even if your account is empty. In other words, below zero. 

How much does a business overdraft cost?

A business overdraft is a relatively inexpensive form of finance, certainly compared to other options. However, it’s important to consider a few key points: 

  1. Maintenance: By having the option of an overdraft, you will most usually have to pay the bank or lender a set sum. This is generally approved on a 12-month revolving basis and is normally around 1.50% or 1.75%, although this depends on which lender you use as terms may vary depending on whom you choose to go with. 
  2. Interest: If you do decide to use the overdraft you will then need to pay interest on the amount you take. This is generally around 1.65% per month although this will depend on your provider. 
  3. Security and guarantor fees: In order to obtain a business overdraft you will have to ask your lender for approval and occasionally this can incur costs. 

Will I have to provide a personal guarantee?

This will very much depend on the strength of your application. If a lender feels satisfied with the strength of your business and the assets you have, they may not ask for a personal guarantee. However, if this is not the case you may have to provide a personal guarantee. 

What are the benefits of using a business overdraft?

Ease: Business overdrafts are generally relatively easy to arrange. 

Peace of mind: Having the option of a business overdraft may offer peace of mind which can prove to be invaluable if you are a business owner. 

Later payers: One of the most challenging aspects of being a business owner is late payments, and a business overdraft may be an incredibly viable solution to this problem. 

Flexibility: Business overdrafts offer you a great deal of flexibility in your business transactions. 

Short term solution: Business overdrafts can be a fantastic short-term solution. 

Limit: With a business overdraft you only borrow the amount of money you need and only when you need it. 

Personal account manager: Some lenders may offer you a personal account manager, or in some cases even a mentor. This could help you better understand your finances and improve the overall health of your businesses’ finances. 

Speed: You could receive a loan approval within a matter of hours, and once approved you could have the money in your account within hours.  

Support: If you chose to use a dedicated loan, they can scour the market for you and find the overdraft that is most suited to your needs and financial objectives. 

Minimum Turnover: With some business overdrafts there is absolutely no minimum turnover, meaning your business might be eligible even if it’s in its earliest startup stages, or going through a difficult time. 

What are the disadvantages of having a business overdraft?

Charges: You will be charged for having an overdraft even if you never use it. 

Interest rates: Interest rates on overdrafts are often higher than those on fixed-term loans. 

Penalties: If you exceed the pre-arranged overdraft limit you may face strict penalties. These can be extremely high. 

Personal Guarantee: If the bank or lender does not feel comfortable with your business finances, they may ask you to act as a personal guarantee on the overdraft. This means they could go after your personal assets if you are unable to pay the borrowed money back. 

Lender discretion: A lender reserves the right to withdraw access to a business overdraft at any time. To avoid any surprises make sure to read through the terms and conditions, as well as any literature that may come from your bank. 

What is the difference between a business overdraft and a personal overdraft?

The main difference between a business overdraft and a personal overdraft is the application process. When a borrower applies for a business loan, a lender will most likely only be interested in your personal credit history and personal income. However, whilst a personal credit rating could come into play with a business overdraft, there are a number of other factors that are likely to affect the overdraft facility. This would include a business’s profitability, cash flow, industry, time in business as well as other pertinent information around your business. This is something to consider when you are deciding to choose from a business overdraft or a personal overdraft. 

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