Business Overdrafts

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What is a business overdraft?

A business overdraft allows you to use a business debit card either to withdraw money or pay for items using money that you don’t currently have in the account. In short, it offers you the ability to spend cash on a credit, with a predetermined limit and rate.

How much does a business overdraft cost?

  1. Maintenance: Simply by having the option of an overdraft, you will generally have to pay the bank 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 bank you use. 
  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 write to the bank 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 the bank feels satisfied with the strength of your business and the assets you have, it 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 well 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 well 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.

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 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. 

Bank discretion: A bank 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 crating may well come into play with a business overdraft, there are a number of other factors that may well 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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