An overdraft is a type of short-term debt finance that you can tap into when your account balance drops below zero.
You will have access to a pre-arranged sum of money your bank provides as credit against a set fee. Each bank has its own overdraft terms, so their costs may vary.
Overdraft advantages and disadvantages
A bank overdraft is useful for managing your short term needs, but it’s not a suitable source of long-term funding. Even though overdrafts are great for smoothing out the cash flow, they are an expensive way to get core borrowing. If you are overdrawn more than half the time, you need to re-evaluate your investment strategy.
How to get a business overdraft
The bank is your friend. Cash flow support is what they are really good at. They know that you have money going into your current account all the time. And they know that they can stop it going out at any time, which makes them a lot less sticky about overdrafts than loans.
Always give notice of your requirements. Springing an overdraft on the bank with little notice suggests bad management and makes them twitchy. Always act like it is the most natural thing in the world to expect and they will share your confidence levels.
Make sure that the relationship is not limited to the times you need a bit of cash flow support. Build a relationship with your bank - drop them a copy of the quarterly management accounts and a compliments slip with the edited highlights like 'trade up 40% year on year again'. If you don’t have quarterly management accounts, you should consider drawing these up going forward.
Visit the Business Wales Finance website for more information on types of finance and how to apply.