Did you know that one in five small businesses made use of a business overdraft in 2020?
If your business doesn’t currently have an overdraft facility, then you’re missing out on some potential benefits.
What is a business overdraft exactly, and how does it work?
Read on to learn more.
What Is a Business Overdraft?
An overdraft is a way to borrow money through a bank account on an ad hoc basis.
If you make a payment, and there isn’t enough money in your account to cover it, your bank will still allow the transaction to go through, up to a set limit. In essence, the bank is lending you additional money on a short-term basis.
A business overdraft is simply an overdraft attached to a business account rather than a general consumer bank account.
How Does a Business Overdraft Work?
Some business accounts may come with a preset overdraft limit, but otherwise, you will need to agree on an overdraft limit with your bank. This is the amount that the bank will allow you to spend beyond the total amount you have in the bank. If you try to spend more than this limit, the payments will be refused.
Once you have your company overdraft set up, you use your business bank account in exactly the same way as normal. The only difference is, that if you spend more than you have in the account, your overdraft will kick in and cover the excess. You will of course need to pay this money back at some point in order to get your bank account back into credit.
You’ll have to pay interest on the amount that you borrow, and there may be additional fees for using your overdraft facility.
Benefits of a Business Overdraft
There are a number of benefits to getting a business overdraft.
Firstly it gives you instant access to additional cash if you’re having cash flow problems. There’s no need to apply for a loan and wait for the outcome; the cash will be available to you instantly.
In addition, some forms of funding incur a tax liability. For example, you will find an SBA grant taxable as well as other business grants. Business overdrafts are not usually taxable, so you won’t have to worry about the impact on your tax bill.
Another key benefit is that you only pay interest on the amount that you use, and as soon as your account is back in the black you’ll stop paying any interest.
A Business Overdraft Can Be a Useful Tool
A business overdraft can be very useful provided that you use it correctly.
It’s a great way to get instant access to additional funds when you need them the most, without having to jump through the hoops required to take out a loan. It should be used carefully, however. If your business is constantly relying on your company overdraft then you’re going to end up paying a lot of fees, interest, or both. It’s really only intended to be used as an emergency stopgap.
If you’re looking for more useful business tips and advice then be sure to check out more of the site.