You might need finance to grow your business – to expand the workforce, purchase essential equipment, or buy stock for new orders.
Use our blog series to understand your options for financing growth, and the advantages and disadvantages of each method.
Part 5: Overdrafts
A business overdraft is an arranged current account facility for established businesses who need flexible borrowing for a short time.
Overdrafts can be used for working capital to cover unexpected costs or payment delays.
Borrowing occurs when payments out of an account exceed the available balance. An arrangement fee plus interest is charged, and security may be required.
Overdrafts are a common way of financing businesses with fluctuating finance requirements. They are provided for an agreed time period.
Advantages of business overdrafts
- Flexible borrowing & repayments
- Keep ownership of busines
- Suitable for short-term borrowing
- Easy and quick to arrange, with immediate access to funds
- Usually no charge for early repayment
- Amount tailored to business cashflow needs
- Suitable when it is difficult to assess funding amount needed
- Interest paid only on overdrawn balance
- Interest and fees normally tax deductible
Disadvantages of business overdrafts
- Pay interest
- Tends to be for smaller sums
- Arrangement fee plus legal fees
- May need Security eg legal charge over property, personal guarantee
- Must comply with conditions, such as covenants, monthly management accounts, projections
- Repayable on demand, unlikely unless financial difficulties
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