Published

August 16, 2022

What is a Business Overdraft Facility?

Business overdraft facilities can be used as a means of borrowing, and a cash flow solution for a business. They can be used instead of business loans as you are only paying for the balance of the overdraft that you are using rather than funds that have not been deployed. 

This means that you are only paying for funds you have borrowed against the overdraft. 

What are the Benefits of Business Overdraft Facilities?

  • Easy access to funds 
  • Easy arrangement process 
  • Interest only payable on the overdraft balance 
  • Interest tends to be calculated daily on the overdrawn balance 
  • No set minimum to pay back on a monthly basis 
  • Can be used in emergencies or with unexpected bills. 
  • You are also free to repay the debt anytime you wish. 

Overdrafts however have the ability to be recalled at any time on request.

What are the Possible Disadvantages of Business Overdraft Facilities?

  • Overdrafts tend to have higher interest rates than business loans 
  • Non payment of an overdraft facility can result in an adverse effect on your business’s credit report 
  • There may also be annual fees applicable for the renewal of the facility 
  • Going over your agreed overdraft limit may incur significant fees 
  • The interest rate is often variable making it hard to account exactly for the cost and account for the interest payments 
  • A bank may withdraw the facility if they see that you are not using it. 

Additional Requirements for Overdraft Facilities

  • If you are applying for a substantial overdraft your bank might ask for this to be secured. 
  • It may be possible to arrange an informal overdraft increase if you have gone over your current overdraft limit. 

What are the Costs Associated with Overdraft Facilities?

  • Account-keeping fee: This is an ongoing fee that is charged by your bank for managing the overdraft facility 
  • Annual/renewal fee: A one-off fee charged annually for the renewal of the facility . This may be a flat fee or a percentage. This could be a flat rate or a percentage of your agreed overdraft limit.
  • Application fee: Most lenders wont charge this but it is one to be aware of 
  • Arrangement fee: This is usually paid upfront to the bank for setting up the business overdraft facility.
  • Change fee: Charged if you want to change your business overdraft limit.

If you have applied for an overdraft facility and been unsuccessful, Provide can see how we may be able to help. Our team of Financial Experts are happy to go over all of your options and find the best finance solution for your business.

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