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Business Bank Overdraft – Is It Right For Us?

A bank overdraft is a credit facility you agree with your bank to allow you to borrow up to an agreed overdraft limit.  It is designed to cover short term borrowing requirements for the financing of working capital.  It should not be used for permanent, long term borrowing.  If part of an agreed overdraft facility is always in debit the bank will refer to this as “hardcore borrowing” and may look to transfer this to a seperate loan faciity or encourage you to use alternative finance such as their own invoice finance department.

Interest is payable on a variable rate basis charged on the outstanding balance on a day to day basis at an agreed margin over bank base rate.  There is usually an initial arrangement fee charged and an annual renewal fee.

Advantages of a Bank Overdraft

  • Flexible.  You only borrow what you need for as long as you need it and only pay for what you use.  This means that often less interest is payable than alternative forms of finance such as bank loans, asset finance or invoice finance.
  • Usually quick and easy to arrange.
  • There is usually no penalty for early settlement.
  • Interest rates within the agreed overdraft limit are often very competitive, particulalry if you have a strong balance sheet.

Diasdvantages of a Bank Overdraft

  • The interest rates and fees for exceeding agreed limits can be very expensive.
  • Annual renewal fees can be increased if your circumstances change such as falling profits or trading losses.
  • High levels of security may be required including charges over Directors personal houses.
  • Your bank overdraft limit may be reduced if your circumstances change, often at a time when you most need it.
  • A bank overdraft is repayable on demand and you can be asked to repay at any time without any warning.  This will often  be at a time which suits the bank and not the customer.
  • Interest rates can be high if you don’t have a strong balance sheet or inadequate security.  They may also be increased if your circumstances change.

In some cases it may be better for a business to consider alternative forms of finance such as business loans, asset finance, asset refinance or invoice finance.  Interest rates often compare favourably and no charges over personal property are required.  In addition they are not repayable on demand.

Please contact us for more information regarding Business Loans, Asset Finance, Asset Refinance or Invoice Finance.

Keith Pallett, Managing Director.