How to effectively utilise a bank overdraft - part two

Bank overdrafts are a great short term funding option that your business can implement when your cash flow is down.

Recently we considered how to determine if a bank overdraft is right for your business. Here we look at the benefit of using an overdraft and how to effectively manage one so it works for your business.

Why use an overdraft?

Overdrafts offer a simple and flexible alternative to making investments when you don't readily have cash available to you. The process involved with an overdraft is simple; if cash isn't available you can easily dip into the overdraft and use that money to fund the purchase.

It's also relatively easy to alter the limit of your overdraft. Although you will agree on a set limit with the bank prior to opening the account, there is a degree of flexibility involved with some banks even allowing you to increase your limit over the phone. However, if the bank determines you won't be able to pay back the increased amount it is unlikely that they will increase your limit.

How to use a bank overdraft

It is essential that when using an overdraft you remember that it should only be there as a short term financial solution. If you remember this key point and use an overdraft appropriately you will be able to avoid excessive interest repayments. This is because payments made are only relevant to the time period you borrow money.

Therefore, if you use $1000 from your overdraft and repay the amount within a week, the interest rate will be significantly lower in comparison to if you had that $1000 outstanding for six months.

An overdraft should only be used for short term investments or requirements. In the case where you are acquiring land or equipment you will probably be better off looking into other forms of financing.

Managing your overdraft

The secret to managing an overdraft is to keep your business account dynamic. In the instance where you have a significant amount of debt or your account has been overdrawn for a long time, you will be better suited to look at long term lending facilities rather than consistently relying on an overdraft.

In most cases your account should be moving into credit at least once every few months, and if it isn't then you may have to review your sources of funding.

You should also work with your bank to ensure you stay on top of your overdraft. Banks understand that business can be unpredictable and they will be able to provide the financial tools you need to ensure you maintain your overdraft in a responsible manner.

Finally, it is beneficial to manage your finances the same way you would an overdraft. Banks look for businesses that are financially stable and the better positioned your business is the more likely the bank will be to offer a better overdraft package. You shouldn't have to worry about being hit with an increased interest rate so long as you are aware of your limit and have made provisions for an increase in the event it is required.

Want to learn about more debt financing options? Click here for more great tips.

Connect with us to receive updates throughout the day:

Like us on Facebok Follow us on Twitter

Dun and Bradstreet AustraliaTop of page Dun & Bradstreet Australia Pty Ltd 2015 | D&B Small Business    *About Us    *Sitemap    *Advertise    *Privacy    *Terms & Conditions