What is a business overdraft? How can a business overdraft help your company with its cash flow? Is a business overdraft right for you?
In this guide, we will outline everything you need to know about business overdrafts to help you find the right business finance solution to suit your company’s objectives and enable long term growth.
What is a Business Overdraft?
A business overdraft is a flexible line of credit linked to a business transaction account. It allows companies to withdraw funds exceeding their current account balance, up to a pre-approved limit.
This financial facility provides businesses with quick access to additional working capital as needed, enabling more effective management of short-term cash flow fluctuations.
How Business Overdrafts Help with Cash Flow Management
87% of small businesses experience cash flow related issues.
Healthy cash flow is vital for covering operational expenses, maintaining stability during market fluctuations, and investing in long-term growth opportunities.
Business overdrafts can serve as a working capital safety net for companies experiencing temporary cash shortages or limited access to necessary funds.
By exceeding the bank account balance, overdrafts can be utilised to:
- Cover daily operational expenses
- Cover unexpected operational expenses
- Bridge the gap between accounts receivables and payables
- Bridge the gap in cash flow caused by late customer payments
- Manage surges in demand by maintaining stock levels or hiring additional labour
- Manage fluctuations in revenue due to demand changes
- Take advantage of bulk orders and early invoice payment discounts
- Take advantage of growth opportunities in the market
- Avoid bounced payment fees or overdrawn accounts for new businesses yet to build sufficient revenue
Should you apply for a Business Overdraft?
Business overdrafts come with both advantages and disadvantages, and the right choice for your business will depend on its specific objectives, needs, and circumstances. That said, it is essential to fully understand the pros and cons of a financial facility like a business overdraft.
Pros
1. Flexibility
Business overdrafts are flexible in that they provide access to working capital whenever you need it but don’t have to be used when you don’t.
2. Interest Charges
Interest is charged only on the amount drawn from the business overdraft facility. If you’re approved for the facility but don’t use any of the capital available, you aren’t charged interest.
3. Quick Access
It’s not just access to the facility that is quick; the set-up process is relatively fast and simple compared to some other financial solutions.
4. Effective Cash Flow Management
With easy and instant access to an overdraft facility, your business can improve its cash flow management and ensure any gaps in access to working capital is effectively smoothed over.
Cons
1. Variable Interest Rates
Most overdraft facilities are subject to variable interest rates. This means that the amount your solution costs you can fluctuate over time and lead to higher costs in the future.
2. Limited Capacity
Business overdrafts do have a limit, of course, and this limit can be relatively low compared to some other financing options.
3. Repayable on Demand
One unique consideration with a business overdraft is that it is repayable on demand meaning that if it comes time to repay the overdraft, this cost can disrupt your ongoing operations if you don’t have sufficient cash flow.
4. Over-reliance
While business overdrafts have their utility, over-reliance on it is a significant risk and can be used to unconsciously mask ongoing cash flow management issues.
Invoice Finance and Business Loans: Alternative Financing Options
While business overdrafts can be useful, other financing solutions may offer more tailored and advantageous terms for businesses seeking access to additional working capital.
Invoice Finance
Invoice Finance allows businesses to secure a line of credit against the value of their outstanding unpaid invoices. Instead of requiring collateral, the invoices themselves are leveraged as security making access to the working capital you need easier and quicker.
Invoice Finance enhances cash flow management by providing businesses with early access to the money owed to them. This improved cash flow reliability makes it easier for businesses to sustain and expand their operations.
This financial facility is scalable and flexible meaning it is a good long-term solution for businesses seeking to grow but not wanting to take on debt.
Business Loans
Boost Business Loans provide much-needed injections of working capital to help cover gaps in cash flow or to enable further investment in the market and in growth.
Whether your business is seeking a secured loan – meaning you have an asset to use as collateral – or an unsecured loan, tailored business loans allow businesses to budget more easily, focus on their short-term business goals, and weather fluctuations in market, demand and sales.
Plus, with funding available within 24 hours from approval, flexible repayment options and no industry restrictions, the right business loan for you can be the right short-term solution to ensure the success of your company.
For other ways to kick-start your business’s growth, read our blog on the topic.
ScotPac – Fast and flexible funding to help your business
Whether Invoice Finance or Business Loans, or an overdraft facility, are right for you will depend on your needs, situation and business goals.
The lending specialists at ScotPac are always here to help you find and access the right fast and flexible funding to help your business fuel its growth. At ScotPac, we provide Business Loans of up to $200,000 and Invoice Finance covering up to 85% of your invoices’ value in advance.
But why choose ScotPac?
We are a trusted provider of award winning financial solutions for small and medium-sized enterprises across New Zealand and Australia. As the largest non-bank lender with 35 years of experience, we proudly support over 8,500 businesses and fund $23.9 billion worth of invoices annually.
Whether you want to learn more about the advantages and disadvantages of a business overdraft facility or explore our flexible and fast funding solutions, contact the ScotPac team today.
