What is an overdraft for a business and when is it needed?
Overdraft is a revolving credit line that a bank can provide to a company or individual entrepreneur to cover a temporary and short-term cash gap. This is actually a business credit card tied to your current account.
When do you need an overdraft?
There are a lot of options for using overdraft, it all depends on the specifics of your business. Here are the main ones:
One-time or regular cash gaps: for example, the peculiarity of your business is that the main expenses are at the beginning of the quarter, and income at the end. During the quarter, you may need additional working capital, which you can take from the overdraft limit;
The need to urgently make a payment to the supplier or to the budget in order to avoid fines, the amount of which exceeds the amount of interest for using an overdraft;
An unexpected opportunity to purchase a product or service at a bargain price, valid for a limited period. There may not be time to get a loan at the bank; a quick decision is needed;
You expect the receipt of money from partners and customers in the near future, but funds for doing business are needed now.
Who is interested in overdraft?
The main users of this service are companies with intensive cash turnover: trade, manufacturing, restaurant business, tourism. Such businesses periodically experience a shortage of funds right now, so the opportunity to close the cash gap for them is a salvation.
Assessing the need for an overdraft just for you, carefully read the terms of the contract and calculate all the options for its use. Pay special attention to hidden charges and penalties for failure to comply with conditions, the existence of a grace period for use, or restrictions imposed on other account transactions.
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How does overdraft work?
You file an overdraft application with the bank and sign the contract. The Bank sets a certain limit for you, within which you can make payments, even if there are not enough funds on the current account, and the deadline for returning one tranche. After that, you can use the overdraft as your own means – if you do not forget to fulfill your obligations under the contract.
When money is credited to the account, they are automatically credited to the overdraft. At the same time, interest for using the bank’s funds is calculated only on the amount that you actually used. As a rule, in kind, the amount of overpayment is small, but the benefits for business development are obvious.
For example, the overdraft limit set for you is 500,000 rubles, the validity period of the limit is 1 year, the overdraft term is 1 month, and the interest rate is 14.5%.
The term for payment for partner services has approached, and you have used 100,000 rubles from the total overdraft limit. After another three days, you paid 60,000 rubles of taxes, also resorting to funds from an overdraft. After 7 days, your account received a payment from the client in the amount of 130,000 rubles, and another 5 days later – the second payment in the amount of 40,000 rubles. These payments automatically went to repay the overdraft (the second payment is only partially).