It’s the beginning of the New Year, a lot of planning is happening at work. But what if you just came back from your well-deserved Summer Holiday and cash flow at your business is an issue? You are not alone, many small and medium-sized businesses have less than 3 months in cash reserves. If you’re a business owner, there may be times when you need to spend more money than is currently in your account. In these cases, a business overdraft can be a huge help.
What is an overdraft facility and how does it work?
When a business has an overdraft, this means they can borrow more money than they have in their account.
An overdraft facility gives businesses and individuals access to a line of credit that extends beyond your available funds, ensuring you are covered for emergency expenses and cash flow issues.
This small business financing option can be helpful if you need to access cash for something expensive quickly, or if you’re waiting for money to come in but it’s going to take a while.
In an emergency, you can call on a line of credit to draw out funds for expenses that are not covered by your regular account.
How does an overdraft work?
An overdraft loan is connected to your existing bank account, so you can continue to manage your business finances as usual. This can be especially helpful during busier times, when you may not have time to wait for a traditional loan application to be approved.
What is the difference between an overdraft and a term business loan?
An overdraft loan is when you are allowed to take out money from your transaction account, up to your overdraft limit, even if you do not have any money in the bank account. The amount you are allowed to borrow depends on the lending criteria and overdraft limit set by your bank.
A term loan is a loan where you borrow a fixed amount of money for a specific period. You will have to pay back this money, plus interest.
What can a business overdraft be used for?
For many small and medium-sized businesses, an overdraft facility can provide access to a cash injection to help them with business purposes such as:
- Wages or hiring more staff
- Marketing or operating expenses
- General working capital and liquidity
- Purchases of stock and materials
- Project/job funding
- Repairs of equipment or premises
Types of overdraft loans
There are two types of overdrafts you can apply for as a business owner – a secured overdraft and an unsecured overdraft.
A secured overdraft is backed by an asset, such as property or vehicles, that the business owns. So, in cases of default on the payments for the overdraft, those assets would act as security.
Unsecured overdrafts are not backed by any assets as collateral. The amount of the overdraft depends on the strength of your business credit score and overall financial history.
Depending on this and the length of the terms for an unsecured overdraft, you may be required to provide a personal guarantee. This means that, in the event of business failure, you may be held liable for the debt.
How do you pay back an overdraft?
Once you’ve withdrawn funds from an overdraft, you will be required to pay the amount back to your business account, plus any interest on the amount. Interest is only applied to the amount withdrawn from the overdraft facility – meaning you don’t pay interest on the entire account balance.
Secured business overdraft interest rates are typically quite low. Unsecured overdrafts generally attract higher interest rates so it’s important to factor this into your overall business budgeting.
Depending on your financial situation or needs, and whether the overdraft is secured or unsecured, there are different ways of paying back an overdraft. Usually, business owners set up a direct debit payment plan with the bank in order to ensure that overdraft repayments are made on time.
What you should consider before getting an overdraft
In order to concentrate on all the important aspects of running your business, an overdraft can help your business by giving you more time to pay bills and purchase inventory.
On the one hand, an overdraft can give you more flexibility in your business finances. On the other hand, it’s important to make sure that you can afford to pay back the loan on time.
Both types of business overdrafts can be useful in quieter periods, like at the beginning of the year, and give you added security to prepare for busier times.
It is also an excellent way to cover short-term cash flow needs without having to take out a business loan from a financial institution or go through a lengthy application process.
If you’re considering an overdraft loan for your business, be sure to weigh the pros and cons.
Benefits and Drawbacks of an overdraft
|» Availability of cash is one the biggest benefits for business owners who opt to get an overdraft.||» Interest rates can be higher than other types of business loans.|
|» Quick access to funds to keep your business running and pay bills on time.||» Fees and charges apply, as well as the interest on money withdrawn.|
|» Draw funds as and when you need them, up to your overdraft limit.||» Unsecured overdrafts typically can attract a higher interest rate.|
|» Only pay interest on the money that has been withdrawn from your transaction account.||» If you can’t repay the overdraft, you or your business assets can be liable.|
How much does an overdraft cost?
As there are many different business overdraft facilities available and as it depends on a few factors, there is no one answer here. It depends on your financial situation, what you are after and what your business needs are.
There may be some of the fees mentioned below included, but again, it all depends on the product which is best for you:
- Establishment fees
- Monthly servicing fees
- Account fees
- Interest fees
- Repayment fees
If you do decide that your business can benefit from an overdraft, it can help you plan for the future. Unlike loans, overdrafts do not usually come with a fixed closure date, so they can be utilised year-to-year, with no additional approval or fees.
How does my business qualify for an overdraft?
Fairway Finance can help with access to a business overdraft and advise on which loan is best for you and your business.
To apply for an overdraft business loan, you must meet some basic criteria by providing some business information:
- Business name and contact details
- ABN that has been active for a minimum of six months
- Six months of bank statements from your business transaction account
Important to remember
There are different types of business overdrafts available that can help with your working capital.
A business overdraft is a great way to purchase stock ahead of your busy times, manage ongoing payments or for improvements around the business. This could include such things as building works or new software, and, of course, for paying wages or BAS. And once in place, you can use it whenever needed.
At the same time, it is important to remember that there are other forms of small business financing out there, which could be better suited for your circumstances.
An overdraft facility is a great way to ensure your business has the cash flow and financial security it needs to grow and succeed. It’s important to have all the facts about what business overdraft is.
So, if you’re unsure, it is always best to consult with an expert who can help find the right business overdraft for you.
How we can help
At Fairway Finance, we pride ourselves on providing financing solutions for all SMEs. We offer a variety of loan types, from a much-needed cash flow boost, any Yellow Goods finance, over to commercial kitchen fit outs or a low doc car loan, to name a few.
What sets us apart is we take the extra time to research your business and work with you to come up with a solution that is best for you. Don’t get stuck in a short-term, high-interest rates loan.