Questions to ask when thinking about Overdraft Replacement

Published on 19th April 2018 - Last update on 31st December 2018

Although overdraft facilities can offer your business access to capital in an emergency, acquiring this form of finance from your bank has become harder in recent years, especially if you’re a developing SME. However, there is another way that your business can quickly receive the funds that it needs. Thanks to the Alternative Finance industry, you can solve this issue by with an Overdraft Replacement facility. Also referred to as Revolving Credit or Alternative Overdraft, Overdraft Replacements allow you to gain access to a Line-of-Credit (LOC) in order to instantly withdraw funds from a previously agreed allowance.

Yet whilst this may sound like the right solution for your business, you need to familiarise yourself with how this type of business finance works. So if you think that your business could benefit from an Overdraft Replacement facility, some of the questions you might want to ask before applying could involve:  

  • How are Overdraft Replacements secured?
  • How much could I borrow using Overdraft Replacement?
  • How to qualify for Overdraft Replacement?
  • How are Overdraft Replacements repaid?
  • Are there any additional costs and fees?

How are Overdraft Replacements secured?

Overdraft Replacements can be termed as either Secured or Unsecured. With a Secured product, you’ll need to present collateral in the form of equipment, machinery, vehicles, property or stock, to act as the security against the loan. Although this boosts lender confidence in your commitment to repaying the loan on time, allowing you to receive a more attractive rate, this also means that these assets are potentially at risk of repossession should your business default. However, Unsecured Overdraft Replacements don’t require you to present collateral. This, in turn, transfers the risk back to the lender, meaning you’re likely to be offered a higher interest rate. In order to gain additional protection on an unsecured agreement, the lender may ask you to offer a Personal Guarantee expressing your commitment to fully repaying the agreement on time.

Need help covering your business’ operating costs? Having trouble coping with an unexpected emergency? Apply for an Overdraft Replacement facility or learn more about your business could benefit

How much can I borrow?

Overdraft Replacement facilities can be used to quickly acquire an allowance for all manner of purposes, much like a business credit card. Although there’s no maximum limit to how big this allowance could be, its size will be subject to a number of factors. As well as assessing the purpose of the agreement, lenders will typically decide on a limit by reviewing your past income or the equity currently held within your stock. Therefore, by applying for Overdraft Replacement, you could quickly receive an allowance tailored to your business, regardless of what you may need it for.

What are the requirements for Overdraft Replacement?

As well as deciding whether or not to provide security, you’ll also need to provide certain documentation. This will help lenders gain a stronger understanding of your business and can range from proof of identity, latest/past banks statement, sales reports, profit and loss statements and collateral documents to inventory management reports or customer orders. So if you intend to apply for an Overdraft Replacement, be sure to get these documents prepared beforehand. If the lender to has to keep coming back and asking you for these documents, it’ll affect how quickly your agreement can be established.

In addition, you’ll need to grant lenders permission to review your business’ credit profile and credit score. Although it won’t always be used against you, this allows lenders to assess your financial situation, see how well you’re performing and decide on an appropriate interest rate. When performing the necessary checks, lenders will look to see whether you have outstanding CCJs, arrears, Accelerated Payment Notices, existing debt and your history of paying off debt. If there are any issues, you need to be upfront. If lenders discover problems that they weren’t made aware of, it will affect the credibility of your application. As such, the weaker your credit score, the more interest you’ll need to pay on any funds that you withdraw, and vice versa.

How do I repay Overdraft Replacement?

Unlike other business finance products that use fixed or flexible monthly repayments, Overdraft Replacements use a Deferred Repayment scheme. You only repay (and are charged interest on) the funds that you draw. Depending on the terms of the agreement, you can fully repay the agreement within either 30 or 90 days, so you can wait until you possess the necessary funds or settle the balance immediately, whichever suits your needs. Also, once you’ve repaid the outstanding balance you can go on to immediately withdraw the funds in the allowance yet again, as it is a revolving system. Therefore, an Overdraft Repayment acts as a buffer for your business, giving you confidence and helping to achieve your goals.

Are there any additional costs and fees involved?

Along with interest, you need to be fully aware of whether there are any additional costs and fees that need to be paid. These can vary from arrangement fees, legal costs, administration and commitment fees to overdraft penalties. In order to make sure that you’re clear on how the product is charged, read through all documentation provided by the lender carefully. If you still have questions or there are aspects you wish the query, you can arrange a face-to-face meeting to discuss charges, helping you assess the total cost to you. Besides, doing so and checking what other Overdraft Replacement providers may be charging could give you an advantage during negotiations, helping you reduce or even negate some of these additions.

Could your business benefit from using an Overdraft Replacement Facility?

No matter how well your business is run, you’re bound to encounter issues at some point. But when you do, what really matters is how you react. Whether it’s a cash flow shortfall, an unexpected payment demand, out of date stock or slow growth, one way you can resolve any issues affecting your business is by applying for an Overdraft Replacement Facility. Offering your business access to a Line-of-Credit, Overdraft Replacement allows you access to the funds your business needs to remain sustainable and competitive. All you need to decide is which lender to apply to. Fortunately, we’ve already done the legwork for you. Whether you need help supporting your operating costs or investing in your business, apply for an Overdraft Replacement today, or find out more with Rangewell.


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David Harrison

David Harrison

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