Overdraft: Advantages and Disadvantages

By David Harrison
Content writer
Last update: 8 November 20211 minute read
Overdraft: Advantages and Disadvantages

What you need to know

Bank Overdrafts are often considered a fast and efficient way of borrowing money for a wide range of purposes. Yet, in order to know whether this product is right for your business before placing an application, you need to be fully aware of the advantages and disadvantages

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Nothing is more rewarding than seeing your business grow and achieve a prosperous future. But in order to do so, you need access to enough capital, which can be difficult, especially at short notice. However, one way of achieving short-term access to cash is by applying for a Bank Overdraft. 

Advantages of Bank Overdrafts

Working very much like a credit card facility, Bank Overdrafts offer a variety of advantages. For many business owners, what makes this form of lending such an invaluable tool is the flexibility and reassurance that it offers. It works by offering your business a Line-of-Credit (LoC) which is, essentially, an allowance with a credit limited based upon your past income. Another great advantage of Bank Overdraft is that this allowance is also subject to little or no usage restrictions, enabling you to draw down funds for a wide variety of purposes, including working capital expenses, tax demands, staff wages, repairing damaged equipment, supporting uneven cash flow, replenishing supplies, funding existing projects or even providing access to emergency funding in times of emergency. Another advantage of this type of funding is that you’re under no obligation to use any of the funds that are available, meaning that you can make use of the Overdraft Facility without any pressure from the bank to do so. In addition, once you’ve fully repaid the funds that have been withdrawn, you’ll regain access to the full allowance, enabling you to instantly draw down and repay funds on a revolving cycle. As such, the advantage of a Bank Overdraft is that it acts as a protective buffer for your business’ finances.

Looking to raise funds for your business? Need capital at short notice?

Looking to raise funds for your business? Need capital at short notice?

Apply for an Alternative Overdraft Replacement or learn more about how your business could benefit

Click here to find out more

Disadvantages of Bank Overdrafts

On the other hand, although there are plenty of Bank Overdraft advantages to speak of, this product also has its fair share of constraints that you need to be aware of as well. For one, in order to qualify for a Bank Overdraft, you may be required to have an account with the bank that you’re applying to. Plus, even if you do, banks generally tend to impose strict application requirements which could be an issue if you’re an SME with a limited trading history, adverse credit or a lack of sufficient assets (equipment, machinery, vehicles or property) to support your request. Also, because the allowance is based on your business’ past income, a Bank Overdraft might not be suitable if you need to borrow more than what your business has been generating in revenue. You’ll also be charged interest on the overdraft (amount withdrawn) for each day that it’s in use. As such, repaying it as soon as you’re able to would be in your benefit.

Another disadvantage of Bank Overdrafts is that after repaying the funds that you’ve borrowed, you may need to renegotiate the limit of the allowance periodically in order to ensure that you have access to a sufficient amount of support when required in future, since the bank may choose to occasionally review the credit limit.

This is an important factor to consider since if you go beyond the credit limit you’ll be charged an Overdraft Penalty, which will also be subject to interest. Plus, because Bank Overdrafts are usually Secured agreements, your business’ assets are at risk of repossession should you fail to repay what you’ve borrowed on time.

Alternative Overdraft Replacement

However, if you’re thinking about seizing upon the advantages of Bank Overdraft facilities, you don’t necessarily need to go through your bank. In fact, because of the growing prominence of the Alternative Finance industry, more and more business owners are gaining access to a variety of business finance agreements that may not be on offer with their bank, including Overdraft Replacement. Overdraft Replacement works in the same way as a Bank Overdraft, but expands on the advantages and doesn’t require you to set up an account since you’re given access to a lender-controlled facility. As such, you could be approved in as little as 48 hours, depending on the complexity of your request. So if this sounds like the type of funding that your business stands to benefit from, all you need to do is source an agreement from a lender you can trust, which is where we can help.

Looking to raise money for your business?

Raising capital for your business is a crucial responsibility that you can’t afford to overlook. The problem is that capital isn’t easy to come by, especially in large amounts or at short notice. So in order to overcome this issue, you may decide to apply for a Bank Overdraft. However, with many financial institutions preferring to deal with big business, getting accepted may not be easy. Instead, you might want to think outside the box and explore what the Alternative Finance Industry has to offer, such as Overdraft Replacement. The only obstacle standing in your way is sourcing a suitable agreement from a reputable lender, which is where speaking with a qualified business finance professional could prove invaluable.

Ready to apply for an Alternative Overdraft?

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At Rangewell, we’re an Access to Finance specialist who’s mapped over 400 lenders to offer you an overview of more than 23,000 business finance products. Our services are free to use and we’ll also guide you through the application process. So if you’re looking to raise funds for your business at short notice, apply for an Alternative Overdraft Replacement today or find out more with Rangewell.

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