Many of us are familiar with overdrafts as it is one of the few funding options open to both personal and business finance. Although the basic concept remains the same – you are borrowing from your bank once your current account has run out – there are some differences.
When applying for a business overdraft a bank manager will request a lot more information, including how the funds will be used, what the risks are and how you plan to manage them. This will include the production of a documented business plan and related financial forecasts, including profit and loss, balance sheet and cash flow projections. And after all this hard work, many SMEs still face the strong likelihood of being turned down!
In terms of costs, the bank will charge both an arrangement fee for putting the facility in place and an interest charge on an ongoing basis for the funds overdrawn. This will be calculated on a daily basis. In addition the bank will charge a further arrangement fee each time the facility is renewed.
Selective Invoice Finance (SIF) can prove an effective alternative to a bank overdraft as these facilities have the flexibility to be used as and when needed to meet a company’s working capital requirements.