You might be familiar with the term “overdrafts” throughout the years you’ve had bank accounts. Typically, it is referred to as the point when you have spent more money than exists in your account and your bank will charge you an overdraft fee for having insufficient funds. This is what you’d normally see with a personal overdraft.
However, there is another form of over drafting called “business overdrafts” that functions a little differently and can actually be seen as way to manage cash flow if you need it. We’ll break down the differences, pros and cons, and help guide you through the overdraft process as a small business owner.
A business overdraft is an agreement with your bank or financial institution that actually allows you to withdraw more money from your business checking account than its current balance. It is essentially a form of short-term borrowing that can be useful if you need temporary funds for a drop in cash flow or unexpected expenses. The agreement allows you to withdraw in excess up to a pre-defined maximum.
There are two types of business overdrafts: formal and informal. A formal overdraft is agreed upon by you and the bank in advance and establishes a borrowing limit and interest rate. An informal overdraft has no formal agreement in place, and the bank covers the cost if you spend beyond your account limit. But without a formal agreement, the cost of an informal overdraft is higher and has a shorter repayment window.
There are many benefits to having a business overdraft in place as a small business, but there can also be some downsides or reasons you may want to avoid them. It’s important to consider all these factors before agreeing to overdraft terms.
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Cons
To learn more about the business overdraft options you have available to you at your bank or financial institution, be sure to reach out to your bankers and advisors. They will be able to tell you everything you need to know about the process of getting an overdraft, what your repayment terms will be, and what the interest rates are.
At Republic Bank, we have experts on staff ready to help you better manage your business finances and get you connected to the best funding options for you. You can reach us by phone at 800-526-9127 or read our other posts for more money management tips.