A Business Overdraft is a short-term facility which can help cover business costs, emergencies, or to help manage your cash flow. An overdraft is typically provided by your bank.
- Business overdrafts offer you a ‘buffer’ on your business bank account, allowing your balance to go below zero.
- Banks typically charge an annual fee to maintain an overdraft facility.
- When you use the bank’s money, you pay them interest. Once your account is back in the black you don’t.
How does a Business Overdraft work?
Almost all businesses have a bank account. An overdraft is a set amount which the bank will allow your account to drop below zero. When your account does drop below zero, you’ll be charged interest daily on the amount you’ve withdrawn. When your account goes back to zero or above, you stop using the overdraft and stop being charged. An overdraft contract is usually fixed for 12 months.
Most companies will be able to get access to an overdraft from their bank, and it’s a relatively inexpensive form of finance. However, the amount a business can get approved for is typically far less than their monthly turnover. This means that for stock purchases and other working capital investments, an overdraft will often not cover the costs of these payments.
How much does a Business Overdraft cost?
Most providers offer overdraft facilities at an interest rate of around 1.65% per month. This rate is usually tied to thebase rate, a rate set by the Bank of England. If this rate rises, it’s likely the cost of your overdraft will too. In June 2015, the base rate was at a record low of 0.5%.
Aside from the interest rate, there are other fees to pay for an overdraft. You’ll have to pay an annual fee of between 1.50% and 1.75% of the approved limit just to have the overdraft in place. There may also be security and guarantor fees to pay when making your application – make sure to check with your chosen provider before signing a contract.
An artisan baker has its high selling seasons at Easter and Christmas. They have to pay their suppliers in advance, so use their business overdraft of £20,000 to bridge the gap. Over three months at 1.65% per month, they are charged £990 in interest.
Frequently Asked Questions
Will I have to provide a personal guarantee?
Whether you’ll have to provide a personal guarantee to qualify for a bank overdraft depends on the strength of your business and the value of your assets. If the bank doesn’t think your assets are valuable enough to secure the overdraft against, they may ask you to sign a personal guarantee. This means you are legally liable for repaying the money borrowed, even if your business shuts down.
What if the bank closes my account?
A business overdraft is callable. This means the bank can require you pay all outstanding sums and interest at their discretion – but they’re probably not going to do this if you don’t break the terms of your contract (if nothing else it would be bad PR!).