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Overdraft Add to toolbox

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This is a type of credit facility you arrange with the bank you have a business account open with. It allows you to temporarily use more money than you currently have in your account to cover short-term financial emergencies, such as paying your suppliers.

The way banks make their money out of this is by charging you a high interest rate (usually between 10%-20%) when paying back the money. Different banks have different rules on how long you have to pay back the amount before they start charging interest. This could be daily/weekly/monthly, so ensure you know all the conditions well before you agree to using this credit facility, to avoid big charges. 

 

The interest may seem small, but remember the higher the amount you borrow the higher amount you pay back in interest.

 

Business owners like to use it:

  • Instant access to funds
  • Usually as an emergency only, due to the high charges involved
  • Quick to arrange, BUT must be arranged with your bank prior to using this facility. Some banks have ‘hidden charges’, for example you may get access to an overdraft facility without previously arranging it with your bank. You can notice this when you check your statement and see that an amount has been taken out of your account that is equal to more money you had and this figure will usually have a – before it.
  • If your business does not require much startup capital and you can pay it back quickly (or within the agreed repayment period) then this is useful.

 

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