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Things to watch out for when dealing with Overdraft Replacement facilities

Published on 1st April 2019 - Last update on 4th July 2020

One of the most fickle aspects of running a successful business is ensuring that your cash flow is reliable and can support your operating costs and growth aspirations. But if you were to run into a cashflow shortfall or other unexpected expense, the pressure this may place upon your working capital could make achieving your short- or long-term goals challenging. However, there’s one business finance solution that could help. Overdraft Replacement offers your business access to a Line of Credit that enables you to withdraw funds from an allowance for a wide range of purposes. Yet, although Overdraft Replacement can be a useful short-term finance solution to use, there are aspects that you need to be aware of in order to make an informed decision. So before applying for an Overdraft Replacement, you must consider:

  • How much are you allowed to borrow?
  • How much interest is involved?
  • What additional costs and fees are there?

How much can my business borrow?

When using an Overdraft Replacement facility you receive a Line of Credit that allows you to withdraw funds from an allowance. Although you can to borrow any amount you wish from this allowance, it does have a credit limit which is usually determined by your business’ past income. If you happen to withdraw more money than what was agreed you’ll incur an overdraft penalty as a result, which will add to the overall cost of finance. So despite being able to use these funds for a wide range of purposes, if your business requires access to more money than what the allowance allows, you might find this type of finance restrictive.

Have you run into a slow trading period? Need help meeting your financial commitments? Apply for Overdraft Replacement or learn more about how your business could benefit.

How much interest is charged with Overdraft Replacement?

With an Overdraft Replacement facility, you only repay and get charged interest on the funds that you’ve withdrawn. It is also worth remembering that you are also under no obligation to make use of any of these funds. However, Overdraft Replacement facilities typically come with a high interest rate attached, which is also determined by the strength of your business’ credit score. Plus, like a credit card, you have 30 - 90 days to fully repay the money that you’ve borrowed. Therefore, Overdraft Replacement should be considered as a short-term solution with funds only being withdrawn if you have a credible means of repaying them, and there’s a strong case for doing so.

Are there additional charges that I need to be aware of when using Overdraft Replacement?

As well as interest, you may encounter a number of additionals costs and fees, which tend to vary from lender to lender. These can range from arrangement fees, legal costs, administration, commitment fees to overdraft penalties. So before entering any potential agreements, you need to make sure that you’re fully aware of all the costs that may be involved and how they’re calculated. These should be outlined in the documents provided by the lender, but if you have queries you can request to have them explained to you in a face-to-face meeting. Doing so will give you the added advantage of being able to compare to products from different lenders and use these findings to reduce or negate these costs during negotiations.

Still thinking that your business could benefit from an Overdraft Replacement?

If your business is currently experiencing a cashflow shortfall that’s affecting your finances and ability to invest, Overdraft Replacement is still a great way of keeping your business afloat. But if you’re still unsure or have further question, you should seek out the services of qualified finance professionals. At Rangewell, we working over 350 lenders to give you an in-depth overview of more 23,000 business finance products. Our services are free to use and impartial. We’ll also guide you through each stage of the application, helping you acquire an agreement that’s appropriate for your business needs. So if 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

Content writer
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