This is the most common type of product for a business to fund it’s working capital position. We all know that in most cases there is a gap between the time we need to purchase goods and the time we receive payment for those goods. An overdraft funds this gap.
Overdrafts should operate on a fully fluctuating basis, i.e. the overdraft should continually fluctuate from a credit to a debit balance. Lenders use average balances, “days in overdraft” and “days in credit”, to help them understand the working capital needs of the business. This is particularly important for a banker to determine if a business is growing or slowing, and then to match the right working capital product and solution for your business.
These products tend to be more expensive compared with a commercial loan or business mortgage as they are very flexible given the fluctuating nature of the overdraft, and that you only pay for what you use. Overdrafts also incur regular ongoing fee’s and charges which can be considerable over a 12 month period.
The benefits of taking out a overdraft
- You only pay interest on the amount you use.
- They work well for seasonal requirements providing a buffer should you win more contracts or your business is expanding.
- Linked to the business cheque account, there is no need to transfer money from one account to another.
- They give you flexibility for your day to day working requirements.