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The most flexible business borrowing is an agreed business overdraft, an overdraft is a borrowing facility attached to your bank account which allows you to borrow money quickly from your bank when you need it. You will usually pay a fixed fee for the borrowing facility and interest on the amount you borrow. Overdrafts are perfect for covering day-to-day expenses particularly to see you through cash-flow expenses.

Business overdrafts can be useful for short-term business funding and can be arranged as a contingency plan against shortfall in cash flow. Businesses should prepare cashflow projections six months advance so that you can identify any potential shortfalls in cashflow and organise some form of business funding.

It is useful to allow at least two weeks for arranging the overdraft, as the bank will usually need to review the request and may need copies of your accounts and forecasts. The bank may also want some security for the loan, such as a personal guarantee from a Director of the business. Like all forms of borrowing the bank will need to be confident that the overdraft will be repaid.

Of course there are advantages and disadvantages of overdrafts and this guide will help you to decide if a business overdraft is right for you and your business needs.

Advantages of overdrafts

The main advantages of overdrafts are that they are flexible, meaning that you only borrow what you need, when you need it, which means that they are often cheaper than business loans. They are also quick to arrange and there is not normally are charge if you pay off the overdraft earlier than expected.

Disadvantages of overdrafts

However the disadvantages are that you can only get an overdraft from the bank where you have your current account, if you want to get an overdraft from a different bank you will need to move your bank account. If need to extend your overdraft you usually have to pay an arrangement fee, and you could be charged if you go over your overdraft limit. The bank also has the right to request you to pay back your overdraft at any time, and if business assets are used to secure your overdraft the bank can take control of these if you don't pay off your overdraft.

The interest rate on the overdraft limit is also nearly always variable, which makes it difficult to accurately calculate your borrowing costs, therefore overdrafts may not be the most cost effective solution to your business funding issues.

For further information about business finance please contact our advice team on 0800 597 4757 or apply online using the form opposite.