Three key considerations:
- An overdraft is predominantly for short-term needs, although it is possible to renew this over several years, and to increase or reduce it according to the business needs.
- Overdrafts can be extremely useful for managing cash flow on a day-to-day basis, and are only available from your bank.
- An overdraft is essentially a revolving credit facility. Your bank is likely to charge an arrangement fee, and the interest charged is typically a margin (e.g. 5%) above the current base rate.
What is an overdraft used for?
Overdrafts are often what a business uses to help day-to-day short-term requirements and as it grows incrementally. Loans, leasing or hire purchase agreements are in most cases better suited to larger longer-term purchases, such as investment in plant and machinery, computers or transport.
While it is almost always the case that an entrepreneur will benefit from the knowledge, insight and network of advisers who deal day-to-day with banks and other finance providers, businesses themselves should cultivate relationships with banks and other finance providers, who may help meet future financing requirements rather than just the immediate needs.
Obtaining a loan or overdraft
To obtain a loan or overdraft, management must prove to the lender that the business will generate the income and cash to both repay the facility according to the terms of the loan and service the loan by meeting interest payments. Market conditions and regulatory requirements, such as those that mandate responsible lending to viable businesses, may also impact the ease with which a business can access a loan or overdraft.
It is likely (though not always the case) that the business will need to provide security for any money borrowed against other personal or business assets.
We recommend that if you are looking for an overdraft, you speak to your own bank or adviser, or visit the UK Finance website.
To explore the other finance options for your business, go back to the Finance Journey tool.