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Business Overdrafts; The Pros And Cons
Business overdrafts are used by many companies as a way to gain ready finances and to maintain cashflow. Essentially business overdrafts are considered as a useful borrowing set up that comes as part of a bank account. Typically an overdraft amount is agreed between the bank and the business and is constantly available to cater for day to day payments. While loans are a more financially viable method of long term borrowing business overdrafts can be seen as a great short term measure. The purpose of this article is to set out the various advantages and disadvantages of using business loans.
The first and most important advantage of using business overdrafts is that they are above all, flexible. They give companies the opportunity to fix short term financial issues and allow users to gain the exact amount they require at a specific time. In some cases, this form of short term borrowing can work out cheaper than a loan. Companies only ever have to pay interest on the amount they have borrowed, rather than a loan that has interest calculated for the entire sum.
Business overdrafts are quick and easy to arrange and in some cases can even be set up over the phone or on the internet. Additionally, unlike a loan an overdraft will not typically have a penalty clause for early repayment, meaning that the sum can be paid off whenever the funds become available to do so.
That said an overdraft does carry certain disadvantages. Some banks will charge extra if the overdraft amount is extended, additionally large fines can be charged if the limit is exceeded, meaning that when the overdraft is being set up it is often advisable to err on the side of caution and allow for more than is likely to be borrowed.
Banks have the right to recall an overdraft at any time, in its entirety. This can be extremely troublesome if repayments cannot be met. Another disadvantage is that some overdrafts act like secure loans and hence put business assets at risk if the repayments are not made.
Whereas a loan can be gained from any lender typically an overdraft will only be available with the bank that holds the account, this means that if a better deal is to be found elsewhere, the entire business bank account must be moved. Additionally using overdrafts make calculating monthly costs difficult, as nearly all of the time they subscribe to a variable rate of interest.
It is hoped that this article has highlighted some of the more common pros and cons associated with business overdrafts. As previously stated an overdraft can be useful in the short term but should not be used exclusively as a way of borrowing over an extended period of time. Ultimately with a detailed and conscientious research process it should be possible to find a bank overdraft that suits the needs of a company, without compromising its financial security.
About the Author Financial expert Thomas Pretty looks at the use of business overdrafts as a form of borrowing and why care should be taken when agreeing an overdraft with bank.
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