If you have a business or are currently planning a new venture, then you may have already heard about bank overdraft – but what is it? For starters, it’s essentially a line of credit attached to a business bank account or debit card, which lets businesses draw on money beyond the approved limit. It can be used for paying employees, buying stocks, settling invoices, and covering other expenses.
Now that you know about bank overdrafts, you may be considering if it’s right for your business – particularly its pros and cons. We’ve done the homework, so check them below:
Pros of Bank Overdraft
1.Cash flow
A bank overdraft can help you fund diverse business needs when you don’t currently have capital on hand, this is very helpful for expanding or unexpected expenses.
2.Good safety net
One of the top benefits of a bank overdraft is you are only required to pay interest on the amount you overdraw, making the cost relatively low (depending on fees). This is a safety net that you may not have to use anyway.
3.Flexible terms
You can discuss this with your lender, specifically the period you’d like the business overdraft for availability plus you may even be able to get it renewed. It’s also possible to have it closed at any time, but if you do, you must pay off any outstanding balance or fees.
4.Choice of security
Banks typically offer both secured and unsecured overdrafts. The benefit of a secured overdraft is you’ll likely pay a lower interest rate when you use a property or another asset as security, while unsecured overdraft tends to be charged a higher interest rate although you won’t need any collateral.
Cons of Bank Overdraft
1. Fees
You may still need to pay overdraft fees even if you don’t touch it! These include application fees, annual fees, which are generally charged as a dollar figure or as a percentage of the whole limit as well as late payment fees.
2.Interest rates
While you don’t need to pay any interest on the balance of the overdraft you’re not using, you will be charged an interest rate, typically a daily rate on the money you draw upon. Note that business overdraft interest rates can be higher than business loan interest rates, so weigh both as business funding solutions.
3.Quick termination
While you can terminate your bank overdraft at any time, the lender could do the same as well if you default on payment or breach any guideline they set.
End Note
Business overdrafts are a good option for startups and medium-sized businesses when cash flow is tight. Take note that business changes over time. You need to evaluate your options regularly, perhaps with a business lawyer or a trusted advisor. This conversation must focus on what is needed for the business in the short-term because bank overdrafts are not recommended for long-term use.
There you have it, when shopping for a lending institution for a bank overdraft, consider their fees, customer reviews, and actual industry rating. Best of luck!