There are different ways of funding a business and if you are thinking of using an overdraft facility, it could prove to be really helpful for the business in case of an emergency. It helps borrow money for the short term and will allow you to make the most of a business opportunity. Many lenders in the industry offer the facility but there are some pros and cons to be considered. Let us first take a look at what overdraft is and how it works.
What is an overdraft?
An overdraft is the first choice of many businesses. It is usually attached to the current account you have and allows you to spend money when the balance is zero. You can pay it back whenever you get paid or you deposit the money. The lender or your bank will agree to a set limit based on your history and transactions. You can overdraw beyond the amount but you will have to pay interest or fees for the same.
There are some accounts that let you go overdrawn even when you do not have a set limit. But in such cases, the fees or interest rate is higher. It is a service that allows you to have access to credit even when the bank balance is nil. An overdraft can give a scene of security to businesses as they continue to grow and provides flexibility with the cash flow. Let us now consider the pros and cons of overdraft.
Pros of an overdraft
- Overdrafts are a great choice for seasonal businesses because it helps cover the short-term shortage in cash flow.
- You only have to pay interest on the funds you withdraw
- There are no issues about payment fees or bounced cheques if you do not have enough funds in the bank account.
- It is possible to apply for overdraft facility anytime and the application process is simple and quick.
- They are ideal for emergency situations when the bills are not yet due but you need funds to keep the business going.
- There is no repayment schedule you need to worry about.
Cons of an overdraft
- Overdrafts can attract fees and interest. In some cases, the interest rate is higher than the business loan.
- It does not work for the long-term.
- If your business is constantly suffering from liquidity problems, overdraft facility will not be an ideal solution.
- The penalty fees will be higher if you go over the limit.
The overdraft limit you enjoy will depend on your history and the lender has the right to stop the facility if you do not meet their terms and contains. It is an ideal option if there is an emergency and you need immediate access to funds. If you continuously max out the overdraft, it will become difficult to get credit. It is a great option if the cash in the business is right. But you must always consider the pros and cons and the cost of an overdraft facility. Review your options from time to time because the needs of the business may change as it grows with time.