Last editedMar 20222 min read
One of the biggest challenges of running an SME is maintaining healthy cash flow. Maintaining healthy turnover while keeping operational expenses manageable is the key to maintaining liquidity. But that’s much easier said than done, especially in 2022. As inflation soars to a projected 6%, companies of all shapes and sizes are preparing for the cost of doing business to get much higher.
As such, many business owners are considering the different lines of credit available to them. And just as one’s personal overdraft can provide a useful buffer when outgoing expenses exceed income, a business overdraft can also help SMEs through periods where cash flow is stymied.
Here, we’ll look at the relative merits and caveats of business overdrafts for SMEs.
What is a business overdraft?
A business overdraft allows you access to additional funds when your business bank account balance reaches £0. It is set at an agreed amount and can be used as and when needed, and paid back as soon as your operational cash flow allows.
Dipping into your business overdraft occasionally can help to ensure that vendors and employees are paid on time, and help to facilitate capital investments that might otherwise require the use of a loan or credit card.
What are the benefits of a business overdraft?
Using a business overdraft can be advantageous when compared to a business loan. While you will inevitably be charged interest by your bank (as well as additional fees), you only pay interest on the amount by which you are overdrawn. This interest may be fairly negligible if you only need to use it to free up a few hundred pounds from time to time.
Other potential benefits include:
Business overdrafts are quick and easy to arrange, and can usually be set up within days
They are unsecured, and pose no risk to your business assets
They have a high approval rating, making them a good option for nascent businesses that struggle to establish lines of credit
They are more flexible than business loans, and can be repaid in increments as large or small as your forecasting dictates
Business overdrafts are much more generous than personal overdrafts, with businesses able to borrow up to £250,000 depending on the provider
What are the risks of using a business overdraft?
No line of credit is completely without risk. While a business overdraft has some attractive benefits, SMEs need to consider the caveats that come with them. Especially if they become heavily reliant on their overdrafts.
There are also some other caveats to consider when taking out a business overdraft:
Interest rates may be higher than some business loans (especially secured business loans)
Fees and charges may be applied to your overdraft. Especially if you take longer than agreed to repay it
Charges may affect your business’ credit report
Some overdraft agreements state that the overdraft needs to be repaid on demand, whenever the bank says so, rather than when you’re ready
Who are the top business overdraft providers?
Most high street banks that offer business accounts also offer overdraft facilities. Rates and overdraft limits will vary by provider. A few popular examples include:
Do I need a business overdraft?
A business overdraft can be a useful tool to have. But like any debt, it can become a ball and chain if not properly managed. While it may be a useful precaution to take, at GoCardless, we can help to ease cash flow in other ways to make you less likely to rely on lines of credit.
We aim to help SMEs take control of their finances by collecting payments automatically whenever they are due, reducing their debtor days, and regaining confidence in your cash flow. We can help businesses optimise their accounts receivable and get paid faster, so they can stop reacting and start actively planning for their future.
We can help
If you’re interested in finding out more about business overdrafts and managing cash flow, then get in touch with our financial experts. Discover how GoCardless can help you with ad hoc payments or recurring payments.