When May An Overdraft Facility Benefit A Business?

There are many commercial lending schemes available to businesses from the likes of banks, building societies and other specialist lenders. However, we felt our readers may find it useful to know when an overdraft facility may be the most suitable form of lending.

A business overdraft facility may be used to aid a business's cash flow.
Business overdrafts are provided by the likes of the major banks in the UK.

An overdraft facility can be used for many purposes and tends to be made available by banks and some building societies to businesses. The bank will usually want to either meet up or speak over the phone with the business owners/directors to discuss their requirements for finance. As a general rule, if the borrowing requirement is of a relatively short-term nature or is required at varying times in the month then an overdraft facility may be appropriate.

The bank will agree an overdraft limit on the business current account for a period of time. For instance, that could be for a month, six months or a year or some other period. The limit is placed on the business current account enabling the business to go overdrawn up to the overdraft limit.

Lenders prefer that the borrowing on current account fluctuates into credit rather be permanently in an overdrawn situation. If the later were to happen then the bank may suggest consolidating the “hardcore” balance on the current account onto a business loan or commercial mortgage to repay the debt over a period of time.

A business may find an overdraft facility of benefit to enable it to increase its stock levels with the intention that, when the stock is sold, hopefully with a reasonable profit margin, the monies are then credited to the current account that hopefully restores the account into credit for a period of time. An overdraft facility can also be used for many other short term borrowing requirements such as to aid cash flow should, for instance, the business be waiting for a debtor to pay them.

It is worth noting that you only pay interest on the amount that you are overdrawn but there may be an arrangement fee to set up the facility and legal/valuation fees if security is required in respect of the overdraft facility.

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