Applying for an overdraft needn’t be arduous. Clive Lewis gives us the lowdown on how to make the process as hassle-free as possible
Start-up businesses are continuing to find it difficult to get debt finance, particularly bank loans and overdrafts. At this time of year, many companies are looking for short-term finance until business starts picking up. Clive Lewis, ICAEW head of enterprise, looks at what businesses need to think about to ensure that they are not turned down.
Firstly, ask yourself if an overdraft is the appropriate finance option for your business? An overdraft is a borrowing facility attached to your bank account, set at an agreed limit. It can be drawn on at any time and is most useful for your day-to-day expenses as it can help you to manage your cashflow more flexibly. It is worth noting that loans are probably more appropriate for long-term funding. An overdraft is likely to cost more than a loan for a long-term purchase.
In some circumstances invoice finance may be more appropriate, although it is only available for business-to-business sales. It offers ways to access working capital by unlocking the value of invoices, although interest rates and charges apply on the cash advanced. Invoice discounting allows you to draw on funding secured against approved invoices, while in factoring you can sell invoices to your financier.
Advantages of an overdraft
• An overdraft is flexible - you only borrow what you need at the time which may make it cheaper than a loan.
• It’s quick to arrange.
• There is not normally a charge for paying off the overdraft earlier than expected.
Disadvantages of an overdraft
• If you have to extend your overdraft, you usually have to pay an arrangement fee.
• Your bank could charge you if you exceed your overdraft limit without authorisation.
• The bank has the right to ask for repayment of your overdraft amount at any time, although this is unlikely to happen unless you get into financial difficulties.
• Overdrafts may be secured against business assets.
• Unlike loans, you can only get an overdraft from the bank where you maintain your current account. In order to get an overdraft elsewhere you need to transfer your business bank account.
• The interest rate applied is nearly always variable, making it difficult to accurately calculate your borrowing costs.
• Unutilized overdraft facilities may be reduced by the banks at short notice, although this is unlikely to happen unless you get into financial difficulties.
An overdraft can help you manage day-to-day spending, and may be particularly useful if the cashflow of your business varies a lot, whereas loans are usually more suitable for funding specific investments. Before you approach your bank for either an overdraft or a loan, you need to do some preparatory work.
You need to have a clear idea about how much you want to borrow, what it will be used for, and how it will be repaid. You will need to support your application with information that the bank will request, and which will include your financial records, business plan and details of any security offered. You will need to have a clear idea about your requirements and be able to talk about your longer-term plans, so that the bank will appreciate their role in your business now and into the future.
Any bank will base its decision on the information supplied by the business. Dependent upon the amount of the overdraft sought, this could include management accounts, cash flow and profit forecasts, details of any assets, a business plan and past financial reports. When applying for an overdraft, monthly cash flow projections showing how the overdraft will be utilized, and, ultimately paid off, is key.
A previous poor track record in paying back lending will count against you. It is also important that if you are a business with a troubled history, such as adverse data (bankruptcies, CCJs), you are transparent with what went wrong and have put in place measures to ensure your record is now clean.