Business Overdrafts: A Temporary Financial Solution

A major advantage of using business overdrafts is that they are flexible and allow for impromptu borrowing of funds. In some cases the facility to borrow is always there and is not charged for unless used. This is not always the case however; some banks charge a small monthly fee for overdraft provisions. Additionally they allow a business to borrow the exact amount they need. Overdrafts are also a quick and easy way to borrow, rarely without the need speak to a bank manager.

That is not to say that business overdrafts carry certain disadvantages. The costs of borrowing are often large, and more importantly higher than they would be with a prearranged loan. Charges are also levelled for those who exceed their overdraft limit.

Recall is a lesser known problem with overdrafts. Some banks have the legal entitlement to recall an overdraft in its entirety at any time. Typically however such a practice is not enacted unless repayments are ceased or if the terms and conditions have been voided. In addition some overdraft facilities are secured against an asset that can be put at risk if repayments are not made.

Ultimately the downsides of business overdrafts can be avoided if they are used sensibly and for specific actions. Using an overdraft should be a short term fix to a particular issue and it should not be considered as a way to borrow money over an extended period of time.

This article does not intend to be a complete guide to overdraft facilities or corporate finance more widely; it is simply an introduction to temporary borrowing and how with sensible use an additional lending facility on a bank account can be extremely beneficial to a business.