What Is It?
An overdraft facility is an arranged line of credit set up to cover you when cash flow is low. This is linked to your personal bank account, home loan account or your business. Whether you have bills due before payday or need to pay suppliers during a down period, an overdraft facility will manage the situation.
If you don’t arrange this with your bank and are in need of cash, they will charge an overdraw fee. Having an overdraft facility set up will ensure you avoid these additional fees in times of need. You should check your agreement with the bank or credit provider to see if you have an overdraft facility available.
How Does It Work?
If your bank or credit provider links an overdraft facility to your account, they will generally agree a limit on how much money can be overdrawn. This will vary depending on whether your account is personal or business. In your moment of need, the overdraft facility will cover payments that are greater than the amount in your account. They will then charge you interest on the amount you require and set a repayment deadline. Similar to applying for a loan, you may have to show that you can pay back any money you overdraw. This may involve providing documents that prove your income and assets e.g payslips, tax returns etc.
Be Wary!
If you are seriously considering an overdraft facility, make sure you are aware of all the hidden costs. Overdrafts can be dangerous as they allow you to spend money that you cannot afford. As with most forms of credit, it is the fees hidden in terms and conditions that hit the hardest. Overdrafts charges that go unnoticed include:
- Initial establishment fee
- Periodic service fees
- High interest rates
- Exceeding Limit fee
How an Overdraft Facility Can Help Your Business?
An overdraft facility can be very useful if you are running a business. An ASIC report on business insolvency shows that low cash flow is a main cause of business failure. With this in mind, the biggest benefit to your business is the speed and access to cash. Therefore, a quick injection of money can sometimes be the difference between keeping your business open or closing. If you are concerned about the position of your business, the advice of a business lawyer may be useful to safeguard your future.
Thus, if you can manage the risk and cost, an overdraft facility can act as a get out of jail card for your business in hard times. It is very handy if you are a seasonal business or have recently launched.
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