Specifically for those in business, a business overdraft is intended to provide companies and smaller traders with the comfort of knowing they have extra funds available outside of their business’s usual cash flow. Many small companies are today struggling to make substantial profits and often need a temporary helping hand to cover any capital payments or additional expenditure.
How do Business Overdrafts Work?
As with any overdraft facility, business overdrafts are typically arranged in advance with a lender to agree a set borrowing limit, which will stay in place for a period of up to 12 months. With such authorised overdrafts, customers will then be given instant access to funds once their account balance drops below zero; they can then begin to repay the amount borrowed once they have the means of doing so.
The greatest difference between business overdrafts and more standard ones is the amount of money that can be borrowed. A business overdraft limit can be anything in the region of £1,000 to hundreds of thousands of pounds to meet the borrower’s business requirements. Of course, this will be dependent on a business’ cash flow, and a bank may suggest an overdraft ceiling of 60% to 80% of this income in order to limit the amount of unsustainable debt.
Business Overdraft Rates
Being given the opportunity for a short-term financial loan will nevertheless come at a price. Holders of business bank accounts will receive an interest charge calculated on usually a monthly basis once they become overdrawn. Though this is only paid on the amount that is overdrawn, a business overdraft interest rate can still make overdraft services significantly pricy. Business overdraft rates are usually on a variable or tracker basis and linked to the Bank of England base rate, whereby any interest charged will fluctuate for the borrower’s benefit or to their disadvantage. A company may have agreed on a business overdraft rate with their lender, though banks have the discretion to change this at any time.
Such agreements are also subject to a number of business overdraft charges: these can include arrangement fees upon set up; some lenders also charge an annual fee for renewal of this service.
Unauthorised Business Overdrafts
Further costs will be billed if a company’s overdraft is not pre-arranged with their lender. Commercial customers may make use of an unauthorised overdraft if they are suddenly levied with an unforeseen expense and no contact can be made with a bank quick enough to agree an overdraft limit. These particular business overdraft interest rates are charged for each working day an account is overdrawn and may ultimately end up costing more than the amount being withdrawn. As a business is often an unpredictable venture in the outset, it might be worth setting up an overdraft facility for the convenience of having emergency cash if ever it is needed, and at a cheaper rate than unauthorised overdrafts would incur.
Provided that a business is capable of repaying any borrowings, a business overdraft can greatly assist a commercial account holder if working capital is all tied up, or the business experiences a sudden cash flow drop. It is unadvisable, however, to rely on an overdraft to help fund a business on a long-term basis. A business seeking to make a substantial investment, for example, may instead want to consider a more permanent solution such as one or more business loans.