Banks will be more generous with an overdraft if you have saved and kept within your means consistently in the past.
The more money you have the bigger the overdraft you will be able to get, illogical as that may seem.
A competitive overdraft fee is important if you are likely to be frequently in the red. If you don’t think this will be the case, then a good rate of interest on credit balances is more important.
Advantages
- Comparitively easy to arrange.
- You can have an overdraft for just a month or two, to solve a short-term financial shortfall.
- It gives you cash flow flexibility – a safety margin. If sales are down on your forecasts for a month, then the drop in revenues can be absorbed by an overdraft. An overdraft will “minimise the effect of small purchases on your day-to-day cash flow,” according to HSBC.
- Repay whenever you want.
- No charges, unless you go over your agreed limit.
- Pay interest only on what you use; with a loan you are committed to paying interest every month.
Drawbacks
- Going over your limit incurs often punitive charges, as well as a high interest rate on the amount by which you exceed your limit.
- Some banks charge fees to open an overdraft, renewal fees or even a fee for non-use. Check out the British Banking Association’s (BBA) business account finder to compare the deals offered by banks.
- Not a good form of borrowing for capital or expansion purposes. The interest rate is usually higher than it is for a separate business loan.
- Banks can withdraw the facility from you even when you have not breached the terms and conditions. This is not the case with a loan.
- An overdraft can give you a false sense of financial wellbeing. You do not make regular payments as with a loan, so it can be easy to forget that an overdraft is still a form of borrowing and that when using it you are essentially spending the bank’s money. If you consistently breach the overdraft limit, then it is ceasing to act as a safety net for short-term cash-flow problems.
