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Managing cash flow is a vital part of running a business successfully. However, sometimes you need access to some extra cash to help you cover a range of ongoing business expenses and keep trading normally. This is where a business overdraft comes in handy, designed to help provide cash flow relief when you need it the most.
A business overdraft is a revolving line of credit businesses can have access to when they need access to funds. For example, you may be waiting on payment from clients for completed projects, but you still need to be able to pay the bills and other ongoing business expenses.
A business overdraft can be useful to a wide range of businesses, as it offers the security and confidence that comes with knowing you will have the cash you need to pay suppliers and employees. It can also be used to expand your business or let you negotiate better terms on purchases by enabling you to afford larger upfront purchases.
A business overdraft is typically linked to the business transaction account you hold with your financial provider. It is a revolving line of credit that offers fast access to funds when you need them.
Business overdrafts are available in secured or unsecured form and with fixed or variable interest rates. There is typically no minimum or maximum term and you can tailor a flexible repayment schedule to fit perfectly with your budget.
As business overdrafts tend to attract higher interest rates and fees than other lending products, you need to be wary of getting into too much debt. It’s also vital to familiarise yourself with all the fees and charges attached to an overdraft before signing up.
Another common issue is that many products allow the lender to recall the overdraft at any time. This can be highly inconvenient for business owners.
In order to apply for a business overdraft, you'll need to open a business bank account to link the overdraft facility to.
There are a range of accounts out there which come with the option of an overdraft facility. Once you've opened the bank account, depending on the size of the overdraft and the type of entity your business is, you can apply and get approved for the overdraft online and link it to your account to start accessing the funds.
One of the most common business banking facilities is an overdraft. This type of financing ranges anywhere from $50,000 to $200,000 and is usually secured by property or other assets. Many businesses may come across situations where they need more funding but their bank doesn't approve the loan. This is usually because their secured assets only allow a certain funding limit.
If you're in a position where your bank won't increase your overdraft, you may still be eligible for extra financing, although it does depend on factors such as credit history, type of financing, assets and accounts receivables. Nonetheless, there are a host of options you can choose from.
Common financing facilities include lines of credit, charge cards and term loans. A host of non-bank lenders also offer non-traditional facilities such as invoice financing. In the end, the right decision should be based on your own situation, so consider your options carefully.
Here, your lender approves your credit up to a maximum limit. Repayments are made only based on the amount you withdraw and interest is charged on this amount. You'll also likely pay an annual fee.
These help manage day-to-day expenses by allowing you to charge transactions to a card. However, the amount borrowed must be paid in full by the end of the month. Although no interest is charged, you are required to pay an annual fee.
These are secured or unsecured lump-sum loans, with the full amount disbursed upfront. You'll make fixed monthly repayments according to a predetermined schedule for the loan to be paid in full, with interest, by the end of the term (anywhere between one and seven years).
This is an unsecured facility where you can get up to 85% of your invoices paid upfront from a factoring company, rather than waiting the full 30 to 60 days to receive payment from customers. Invoice factoring, which involves the financier collecting the invoice payments directly, is also an option.
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Is it necessary to own a business to set up an overdraft with my bank?
Hi Chris,
To apply for a business overdraft account, you will need to provide your ABN and other business documentation.
Please read our personal overdraft guide to learn more.
Hope this helps.
Cheers
Matt