A bank overdraft is when someone or a business is able to spend more than what is actually in their bank account. If there is a prior agreement with the account provider for an overdraft, and the amount overdrawn is within the authorized overdraft limit, then interest is normally charged at the agreed rate. If the negative balance exceeds the agreed terms, then additional fees may be charged and higher interest rates may apply.
A bank overdraft is a type of intentional short-term loan as the money is technically borrowed, the associated fees are accepted and the overdraft covered with the next deposit. Overdrafts are a source of working capital financing for many businesses.
ADVANTAGES AND DISADVANTAGES OF OVERDRAFTS
There are many advantages and disadvantages of overdraft to consider when using them as a source of financing. A simple overdraft can, for example, be useful in solving short term financial issues, but overdraft limits can be a major obstacle if you need more money than your limit allows. If you apply for an overdraft, make sure that the limit will cover your financial needs.
Business overdraft rates can vary, making it necessary to do ample research before choosing the right overdraft. One of the main disadvantages of overdrafts is that the interest rates applied to them can often make the debt larger, and so they are not always cost effective.
Whilst regular bank overdrafts are easy to find and compare, there are many more cost effective solutions which could prove to be better suited to a business’s needs. Invoice financing, as offered by Kriya, is one such solution.