If you’re about to get a business overdraft, make sure you know all the pros and cons.
Times are tight, and applying for an overdraft may seem the easiest way forward. After all, it is a relatively simple and flexible way to manage a shortfall.
However, there are also very real reasons to approach an overdraft with caution. Do be sure you’ve considered all your other options carefully.
On the upside
- An overdraft is a simple flexible way of cushioning erratic cashflow
- You pay interest only on the amount you are overdrawn each day
However, that flexibility cuts both ways – settling on an overdraft facility can leave you vulnerable. Here are some key downsides.
On the downside
- Your bank can probably demand repayment at any time
- You may need regularly to renegotiate – and the bank re-check your creditworthiness
- You’ll be charged set-up costs ontop of interest
- You’ll be charged even higher fees if you don’t agree the overdraft properly in advance
- The interest you pay may well be high – boosted by other, additional charges
- You may also have to pay for regular (typically quarterly) reviews
Do carefully consider all your options. See Getting the money you need – 4 routes to finance for an overview from our Head of Enterprise, Clive Lewis. As for so many aspects of making a success of your enterprise, thought up front can pay back dividends.
We’ve also produced a 4 page PDF devoted to Overdrafts and bank loans. And, for a free advice session with an ICAEW accredited accountant near you on this or any other aspect of business finance, simply search our database, ticking the BAS box.